By John Whelan
The political stalemate in Italy has created a rush to safe havens, pushing Italian business and bank stocks down and pulling down the value of the euro.
The reaction of the markets may seem extreme, as volatility in the political system in Italy is not new, where the average government there has lasted a little more than a year in recent decades.
The last time we saw such a drastic international reaction came the week after the Brexit referendum in the UK.
One of the key causes for the reaction may be found in the size of Italy’s sovereign debt which — at €2.3 trillion — is the third largest globally after the US and Germany.
There is also the trading impact of the Italian economy as the third largest within the EU, where it is seen as a key driver of policy.
And, whereas 59% of Italians want to stay within the EU — according to a recent poll — there is no doubting the surge amongst the populist parties drawing support from its anti-Brussels, anti-euro rhetoric.
The Italian crisis is something of a curate’s egg scenario for Irish exporters.
On the one hand, a weakening euro will help offset difficulties experienced in the past year trading with the UK.
The ECB will now be under pressure to defer any easing of the QE programme and the correspondent rising of interest rates.
Hence, exporters may be able to look forward to an extension of the low interest bank lending rates to be extended for at least a further 12 months.
The downside is likely to be seen in deferred orders from Italian businesses and consumers who last year bought €2.6bn of Irish made goods.
This, combined with anaemic growth and wage forecasts for the UK market as an export destination, puts a lot of pressure on exporters.
Contagion from both the UK and Italy may halt the recent return to growth in European markets, and bring back the spectre of recession across the region.
In the short-term Italy may muddle through, but in the longer term there are serious EU issues, including bank debt matters, that must be dealt with if we are to have stable trading markets across Europe.
John Whelan is a leading Irish consultant on international trade