All roads lead to Rome: Why is Italy on everyone’s mind?

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This time it’s not because of Juventus or the largest pizza in the world. Rather, it’s the Italian budget and its potential impact on the European Union and the Euro.

Not too long ago, Greece was on the financial precipice. Amongst Greece’s problems were sky-high interest rates, low GDP, years of deficits, poor productivity, and the list goes on. For months there was bitter debate amongst EU members about how to deal with Greece and its refusal to accept austerity measures. The final decision, like all decisions that come out of the fierce polarizing debate, raged on well after the action was taken. And the repercussions were brutal, culminating in the decision by the UK to leave the EU.

For a while the EU was teetering on the edge, prompted by political division in domestic politics that called for the ending of the EU. Economically, member states became further separated into the “haves” and “have-nots”, with the “haves” beginning to wonder aloud why it should sacrifice its own hard work to bail out its lazy irresponsible members.

In time the EU drew a line in the sand, with a solution that brought an unsteady truce. But the entire world continued to watch and wait, pensively looking over its shoulder for a potential economic cancer that might finally be fatal. Investors always felt that if a truly large member state was imperiled, it might finally topple the EU.

Italy is a critical element of the strength of the EU and represents its third-largest economy. Italy has also been running a budget deficit consistently over the last 20 years. Its debt to GDP ratio is the fourth highest in the world, eclipsed only by Lebanon, Greece, and Japan. So when it provided its proposal to spend 2.4% more than it brings in over the next three years, it sent shockwaves through the EU and the world.

The impact was immediate. Bond yields jumped 20% in a week to their highest levels since 2014. The Euro dropped 2% against the USD. Suddenly the sky-high debt levels, the criticality of Italy to the EU and the memories of Greece were pushed to the forefront of investor’s minds. EU President Jean-Claude Juncker gave voice to the critical concern of investors, “We have to do everything to avoid a new Greece — this time an Italy — crisis.”

Compounding this is the seeming willingness of Italy’s government to withdraw from the Euro. With its size and status in Europe, Italy represents a much larger danger than Greece ever posed. If the Greek issue was existential, the challenge posed by a defaulting Italy is potentially catastrophic.

The reports of Italian government’s agreement to cut back to 2% spending through 2021 is a good sign of the willingness of Italy to continue to work with the EU. Whether it actually occurs remains to be seen. But, the fundamental economic problems remain. The bonds and Euro weakness were not just a sign that investors have written Italy as a potential danger. It is a sign that investors believe that the Italian peril might be driving the EU to its final conclusion.

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About Author

Amram Margalit is a professional writer who has worked in a wide range of settings, including technology companies, nonprofits, and the entertainment industry. Within these positions, Amram has provided quality content and advertising services and is currently the Content Manager at Leverate.