Italian political crisis renews threats to EU unity

An unexpected turn for the worse in Italian politics has heightened fears of Italy sliding out of the Eurozone.

Political mayhem in Italy was also made worse by lingering fears of a trade war between the US and China and a further corruption scandal in Spain.

The net result was markets across the world tumbling with stock markets, bond yields and currencies skittling on the back of uncertainty and rapidly worsening investor sentiment.

The multiple dents to confidence from the political and economic realms sparked a global sell-off, pummelling Asian stocks Wednesday as European and American markets recovered from a slump a day earlier.

Italian bond yields for benchmark 10-year debt rose to around 3%, its highest level in almost two decades.

In Europe, yields on Italian, Spanish, Portuguese and Greek bonds have surged, raising borrowing costs, and widening the gap between German bunds (Europe’s traditional barometer of confidence) to the highest level since 2013, when a rather similar socio-economic yet political debt crisis was hastily being resolved by European policymakers in Greece and Ireland.

Yesterday’s market mayhem helped the Euro fell below 1.16 for the first time in six months after consistent declines from 1.26 in March – an 8% nosedive in just under three months for one of the most stable currencies in the world. Or so investors thought.

Italian chaos

The primary cause of the chaos was caused by Italian President Sergio Mattarella’s refusal to accept the nomination of Paolo Savona as Minister of Economy, despite his selection by the Five Star Movement and Lega majority coalition.

Savona has long advocated an exit from the European Union and a return to a national currency.

Mattarella, selected Carlo Cottarelli, a former International Monetary Fund official, as interim Prime Minister which was seen as destabilising by both investors and Italian voters.

Italian market participants have waited months for a stable government to be formed within the beleaguered state that has been toiling with corruption claims for decades including the infamously numerous Silvio Berlusconi scandals.

European leaders thought they had broken free from doubts about the future of the EU that plagued them after Britain voted to leave two years ago.

The Brexit fiasco was a political reminder that the earlier economic malaise in Greece and Ireland still had plenty of capacity to expose the multi-layered problems involving both politics and economics in the region.

Over the past two days, Italy has brought back all the fears created by Britain, Ireland and Greece in the last five years and has potentially created a far larger problem that may require a far grander solution to the sovereign debt crises still billowing below the surface in Europe.

The variety of solutions put forward in Europe since sovereign debt became a prominent issue in 2011 was seemingly a band-aid to the core problems, with Italy reminding everyone that firm solution is needed.

Italy is Europe’s third largest economy, which makes its troubles all the more influential for the economic bloc – to a far greater degree than Greece or Ireland.

Furthermore, Spain could also be slipping into a political crisis following last week’s revelations from its National Court that 29 top politicians linked to Spain’s ruling party were guilty of corruption.

The combination of multiple economic and political instabilities has left investor sentiment downbeat and brings about the realistic prospect of an end to quantitative easing schemes from the ECB and a return to elevated bond yields (an indicator of market stress and uncertainty).