Concerns About the Euro Increase as The Political Crisis in Italy Intensifies

Concerns About the Euro Increase as The Political Crisis in Italy Intensifies

Italy is currently in a political turmoil, and as concerns that the country might leave the eurozone spreads, the currency's future is in serious jeopardy. Naturally, a euro-crisis could have devastating effects on the world markets.

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On Sunday, the Italian president blocked the creation of a new Italian populist coalition government amidst concerns about their pick for Paolo Savona as economy minister, and it has created a political and economic meltdown in the country. Savona is a known eurosceptic and many experts are doubting his ability to handle the country’s €2 trillion public debt and the fact that Italy’s economy is smaller today than before the 2008 economic crisis.

But where did this all start?

Three months ago, Italy voted in an election which resulted in two populist parties – the anti-establishment 5 Star Movement and the right-wing League party – trying to create a coalition government. However, Italy’s more established politicians and parties have done everything they can to stall the creation of a new government. The last blow finally came on Sunday when the president vetoed the two parties’ attempt to finally get the government up and running. Instead, the president asked a former IMF official, Carlo Cottarelli, to start a new government and stabilize the situation – a decision that was met with skepticism from all sides of the political spectrum.

The risk now is that Italy will be forced to a reelection sometime this coming fall and if either of the two populist parties receives a majority, Italy’s future in the euro-zone will be in the risk zone. Both parties were outspokenly critical about the euro-zone during the elections in March, and if Italy leaves the shared currency the world economy could be set for a disaster.

The Italian Crisis is Spreading

Naturally, this dramatic situation has taken its toll on the euro and EUR/USD is currently trading at its lowest levels since November 2017 after having fallen more than 6 percent in May. If an Italian reelection is set, we can expect to see the euro drop even further.

Although, the Italian crisis isn’t only affecting the European market but has now spread to the American stock market as well. As the political situation in Italy unravels, the country’s debt and bond rates have started rising which in turn has spread to Spain and has lead to the Dow Jones dropping over 200 points.

Today, investors from all over the world are nervous about what is to come, and we can expect a few uncertain weeks on the markets. 

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