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Is Italy Europe’s Next Big Worry?

Kirkegaard, Jacob, Funk , (2017), “Is Italy Europe’s Next Big Worry?”, Peterson Institute, 21 March

Despite the prospects of a good year economically and politically for the euro area in 2017, uncertainty hangs on the horizon over Italy. Once the French election in May is over, investors’ attention will likely turn to Italy, where an election is due no later than May 2018. But the country may not be capable of forming a new viable government in an uncertain economic environment: With a recovering euro area economy, the European Central Bank (ECB) may reduce its asset purchases to zero in 2018, driving up Italian (and Portuguese) bond yields and spreads.

If that happens, ECB President Mario Draghi and his governing council will be torn between pressure to resist doing Rome any favors and the need to stabilize the third largest euro area economy.

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