Coinciding with the sequel of the fiscal cliff, Italy holds general elections. This is considered a risk event as Italy has a high debt-to-GDP ratio and is the euro-zone’s third-largest economy.
Christopher Vecchio of DailyFX analyzes the elections in the context of the European debt crisis, and plays down the hype.
Christopher Vecchio is a currency analyst for DailyFX. With a background in political science and law, he focuses on the interrelationships between geopolitical events, macroeconomic trends, and market reactions. Also an active trader, Christopher monitors the markets around the clock. Expertise: News events, market reactions, and macro trends.
The Italian elections present two rather straightforward outcomes: Mario Monti runs and is reelected, securing Italy’s currency economic reform path; and Mr. Monti does not run, allowing a leftist candidate to take power, but perhaps paving way for a coalition in which Mr. Monti has a strong voice.
Neither of these outcomes should provoke an extreme market reaction; if anything, they could prove neutral to mildly bullish for the Euro. Allowing a demagogue such as Silvio Berlusconi to return to power, which could lead to an unwinding of what progress has been made, is the only outcome presented currently that could prove to be Euro negative, given what reforms have been enacted previously.
As the European debt crisis shown, it is not necessarily about the reforms themselves; but rather, the belief that progress is being made. Accordingly, even if someone such as Silvio Berlusconi were to rise to power and pledge to work closely with Germany on key issues, we know that it is not a guarantee for policy cohesion: French President Francois Hollande has enacted many policies that Germany deems irresponsible.
Drawing on the French and Greek elections that took place in 2012, volatility leading up to the events is possible, but only a surprise outcome will stir Euro traders. When all is said and done, the Italian elections could very well be an over-hyped event early in the year.
Further reading: 5 Most Predictable Currency Pairs – Q1 2013