Viewpoint – June 2018

The stand-out event during the month was the fall-out from the indecisive Italian election in March. An unlikely coalition of the anti-establishment Five Star movement and the far right League was finally able to form a government in May, only to have their nomination for Finance Minister overturned by the President on the grounds of the anti-euro views of the proposed minister and the perceived risk to stability. Investors, increasingly nervous about the populist, anti-euro views of the coalition parties and their policies of radical economic reform, took fright as it seemed the coalition would use this as an opportunity to push for another election, in which the populists could substantially increase their voting share, potentially increasing the risks of

Italy exiting the euro. Eventually a compromise was reached and, with a different finance minister, the coalition formed a new government. However, the damage to Italy’s bond markets and perceived credit worthiness was still apparent. With a government debt to GDP ratio of 130%, one of the highest in the world, Italy remains vulnerable, despite the better performance of its economy in the past year, while many Italians reject the budgetary constraints imposed by what is seen by some as an over reaching Brussels bureaucracy. The conundrum for the Eurozone remains; a single currency without full banking and fiscal unification is inherently unstable and prone to bouts of stress, leading to recent calls for reform.