Panic In Italy

      At the time I am writing this, the Dow Jones Industrial average has dropped around 400 points, while the yield of Italian 2-year bonds has doubled. The general mood across the financial world seems to be one of panic, and politically, fears of chaos in Italy are even higher. But why? What is going on in Italy, and is there a risk of a global financial crisis?

     As is the case with most political troubles in our time, the crisis is rooted in hysterical, radical populism. Italy's elections on March 4th resulted in two populist parties showing strong results - the left wing populist 5-star movement garnered 33% of the votes, while the far-right Northern League garnered 18% of the votes. These two populist groups attempted to put aside their differences in favor of a populist coalition, agreeing to nominate Paolo Savona, a Euro-skeptic economist, as finance minister. However, the President of Italy (who normally has no real power), Sergio Mattarella, used his constitutional authority to veto this choice - a rare sight in Italian politics. Soon after, Italy's prime-minister designate, Giuseppe Conte, abandoned his effort to form a coalition between the Northern League and the 5-star movement. Instead, Carlo Cottarelli, a former IMF director, has been tasked with forming a new government - to the major ire of Italian populists, who have (in their mind) had their worst fears confirmed when it comes to Italy being run by outside, financial powers.

     The ramifications of this move will be most visible in a few months, as Italy could very well hold new elections in the event that a government is not formed. This election would likely see a revitalized and strengthened populist coalition, and would likely play out as a referendum on the European Union and the eurozone - despite the fact that neither populist party included leaving the eurozone in their respective party platforms. If Italy does indeed leave the eurozone, the current panic in the markets could turn into a mad dash to the exits - despite its numerous flaws, the eurozone has greatly contributed to the globalization and prosperity in the 21st century. Furthermore, leaving the European Union or the eurozone could further exacerbate Italy's financial troubles - Italy's debt to GDP ratio stands at a staggering 130% - and the populists plan on adding an additional 100 billion euros to the deficit via tax cuts and spending increases. An Italian default (a prospect which I raised last summer) is looking more and more like a legitimate possibility, and it would cripple the rest of Europe, as the entire European economy is interconnected. If the populists end up cementing their hold on power, either now or in future elections, there are very high odds of an Italian default within 5 years. Italy's economy would be far too big to be bailed out like that of Greece - instead, financial chaos would likely reverberate across Europe and then to the rest of the world, smashing the global economy in the process.
      The radical populist wave has brought nothing but fear, panic, and chaos to the western world. It is imperative that the populists in Italy are defeated, either now or in future elections - the consequences are far too great for the globe to handle otherwise.