Italy

I am finding it rather difficult to know what to make of the recent Italian bond volatility except that it is a bit of a storm in a political tea-cup. The decline of established political parties and the corresponding rise of so-called ‘populist’ parties needs to be put into context. Whatever the rhetoric about leaving the euro-zone, the euro itself remains more popular amongst Europeans than the EU. There is little desire to return to national currencies and if Greece can remain within the euro (at considerable cost to the Greeks), why should not Italy? It is hard to see what about the Five Star Movement and the Northern League would gain from actually giving up the euro, particularly the Northern League whose strength is derived from a region that has done tolerably well out of the EU. Joining the Eurozone was probably not the wisest decision the Italians have ever made but leaving would be equally unwise. All that said should not disguise the serious issues outstanding to help monetary union work better, primarily some form of banking union, greater risk sharing between countries and a more expansive fiscal policy by Germany. Italy itself needs to address its banking sector and the bad loans therein. I see little reason but to expect more of the same, Italy to remain within the Eurozone but with a struggling economy and with bond yields at a substantial premium to those of Germany.