Italy reaffirms commitment to the Euro but trouble may lie ahead

by 11 Jun, 2018

The Italian national flag flies high above the Italian parliament – where a populist uprising has taken centre stage

The European Central Bank must have breathed a large sigh of relief, after the new Italian Economy Minister (as part of the fresh populist coalition) said the new Italian government was not looking to leave the Euro.

The newly appointed Minister Giovanni Tria said: “The position of the government is clear and unanimous. There is no discussion about leaving the euro. The government is determined to prevent any emergence of market conditions that would lead to leaving the euro.” This was a key reason the single currency rallied higher against the Swiss Franc, Japanese Yen, British Pound, US Dollar and Turkish Lira on Monday.

Tria also confirmed the government’s goal of decreasing Italy’s debt this year and in 2019, which helped lift Italian bank stocks. The benchmark Cboe Italy 40 index (an index of 40 Italian large-cap stocks) notched a small gain at the open, as investors cheered some much needed political stability after the volatility in the Italian parliament over the last month

This news will give even more impetus for the European Central Bank to consider ending its quantitative easing programme this year, which already seemed likely, given ECB Chief Economist Peter Praet said last week that market expectations that the ECB will halt its vast bond-buying programme by the end of this year “are plausible”. He added that “underlying strength” in the eurozone economy has bolstered his confidence that inflation will move towards the European Central Bank’s objective, highlighting policymakers’ view that recent weakness (some poor economic data for the Eurozone) is transitory.

An Italian leadership that is more accepting of the European Union as a whole will also play into the hands of EU representatives negotiating with Britain over Brexit, emboldening them further, given that an Italian exit of the single currency could had weakened the EU’s hand in negotiations.

The European Union has managed to so far survive various populist uprisings in the Netherlands, France and Germany in 2017, where the eurosceptic Freedom Party, National Front and AfD (Alternative für Deutscheland) made significant gains in elections last year. Many observers had considered the Italian elections this year as another major turning point in support for the EU after the UK voted for Brexit only 2 years ago. However, even with a convincing populist victory for 2 parties (the League and 5-Star Movement), so far the damage seems relatively minimal.

What comes next though is unclear. Even if the populist government agrees to stay in the Euro, it’s likely it will clash with the European Union on other issues like migration, given that the leader of the League party Matteo Salvini has already made good on promises to start taking a firm stance on stopping migrants entering Italy illegally. This is unlikely to go down well with the European Commission, given that many members are globalists who support open border policies across all of Europe. Investors in Italian stocks should watch this narrative closely!

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