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Europe Plays With Fire on Italy Contagion

Ferdinando Giugliano, (2018), “Europe Plays With Fire on Italy Contagion”Bloomberg Opinion, 5 Δεκεμβρίου

Italy’s populist rulers may have been hoping for some market contagion fear to help them win their budget standoff with Brussels, but so far it’s been a dog that didn’t bark. The economic program of the League and Five Star spooked investors in Italian government bonds, but failed to affect any other member state of the monetary union, barring Greece.

This has weakened Italy’s hand. Had Spain, Portugal and France suffered selloffs, the European Commission might have been more amenable to compromise and the European Central Bank would have found it harder to end monetary stimulus this year.

It’s difficult to believe, though, that what happens in Rome will always stay in Rome. Imagine if Italy came close to losing market access for its bonds and chose not to ask for help from the European Stability Mechanism, the euro zone rescue fund. That’s not out of the question given that it would entail a package of austerity and structural reforms. Italy’s public debt stands at a towering 2.3 trillion euros ($2.6 trillion), the highest in the monetary union. Other fragile member states could easily come under pressure.

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