Turmoil in Italy 'Might Spread to Other Countries in Europe' – Economic Analyst

Sputnik discussed the importance of Italy’s political stability for the global markets with Lorenzo Codogno, Visiting Professor in Practice at the European Institute of the London School of Economics and Political Science, former chief economist and director general at the Treasury Department of the Italian Ministry of Economy and Finance.

Sputnik: The political uncertainty has sent shockwaves across the global markets. Why is Italy’s political stability an important factor for the markets?

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Lorenzo Codogno: Well it is an important factor because the country has a very high debt to GDP ratio and clearly it is vulnerable, and has to go to the market to finance its debt on a monthly basis and the amounts are sizable. So clearly if there is any shift in the market sentiment and the appetite for Italian bonds reduces, it would have an immediate impact on the government bond yield spread. That could provoke another shockwave in terms of domestic credit, because banks have bought the portfolio of bonds on the asset side, and they’re also facing issues of stability, so it’s not just the government bond market, it affects the banks. We've seen stock prices very weak over the past few days, especially for bank stocks, so I think that is the kind of background we’re looking at.

Sputnik: Would you agree that there are all chances that the ongoing turmoil in Italy would lead to even broader instability within the eurozone, considering the fact that there will probably be snap elections and it's quite likely the eurosceptic parties will only strengthen their position?

Lorenzo Codogno: First of all, it’s not clear what’s going to happen, because the latest pieces of information seem to suggest that maybe there is a way to kind of re-launch the idea of the Five Star joining forces together with the League on a platform which is less anti-Europe, so they might actually commit on euro participation and fiscal sustainability. By doing so they might actually get the green light from the president. However, the risk is clear that if this turmoil continues, it might spread out into other countries in Europe and, as we have seen in the past, it might be contagious.

Sputnik: What is your take on Carlo Cottarelli, Italy’s pick for a caretaker prime minister?

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Lorenzo Codogno: On a personal basis he’s clearly a very well-known economist and the perfect choice, but he has an almost impossible task because even if he manages to have a government, a squad, and present it to the president, almost for sure he will fail to gain the confidence vote in Parliament and effectively no party would support him, so he would remain extremely weak and just to have a caretaker until the next elections, and two months without a government, effectively, would be very risky for Italy, so I think it’s not a good choice at the moment, it would be a better solution to have a full-fledged government in place.

Sputnik: What do we know about the current stance regarding Five Star and the League regarding the euro, because they dropped their initial ambition that they spoke of, of exiting the euro; they were talking about trying to reform it, what is their position regarding the euro now?

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Lorenzo Codogno: Before the elections, they had some eurosceptic language in their programs and particularly on the League side clearly they were not in favor of further European integration. On the Five Star Movement side, there were calls to hold a referendum at some point in the future. During the campaign they kind of toned down their statements, but after the election results they agreed on what they called a contract in which there were some worrying statements such as asking the ECB to cancel 150 billion euros in Italian debt or the idea of asking for a smooth, negotiated way to exit the euro, this was the draft version of the contract, the final version didn’t have these statements, but clearly people understood that they had this kind of an unusual attitude towards Europe. So my feeling is that they have to scale down their ambitions quite substantially in order to have the green light of the president. The president stopped this government's candidacy of Mr. Savona who is perceived to be deeply Eurosceptic. So I think it is still possible to have an anti-establishment government, but they have to scale back substantially and make a strong commitment to Europe, otherwise, it would be difficult to see this government take office.

The views and opinions expressed in this article are those of the speaker and do not necessarily reflect those of Sputnik.