Neither of those two things is likely to happen because the Italian populace, as divided as it is, remains strongly in favor of the euro. They might hate elite politicians, and they might hate Brussels-imposed austerity, and they might vote for extremist parties like the Five Star Movement and the League—but they’re not about to vote to leave the euro, and the populists know that. [...]
Italy is too big to fail, but it’s also too big to rescue. While Greece could, ultimately, get bailed out by the European Union and the IMF, Italy can’t be. There just isn’t enough money. Without the low interest rates that accompany euro membership, Italy would be forced to default, and everybody who holds Italian debt, including virtually every major European bank, would be forced to take the kind of losses that lead straight to insolvency. Italy would become a disaster zone, but the rest of the world would suffer a major crisis and recession as well.
Ultimately, that’s why Italy’s president, Sergio Mattarella, refused to allow a euroskeptic to become finance minister. Governments come and governments go—that’s normal in Italy—but it’s Mattarella’s job as president to keep his country from self-destructing. He accepted the parties that won the election; he even suggested a different League representative as finance minister, one who didn’t want to bail on the euro. But the League didn’t bite, and the result is the current spate of nervousness and uncertainty, none of which is going to be resolved at least until the Five Star Movement and the League make it clear whether they’re going to fight the next election on an anti-euro platform. In the parlance of financial markets, we’re in “risk off” mode for the time being, with investors retreating to the safest havens they can find.
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