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Greg Gibbs, Analyst at Amplifying Global FX Capital, suggests that Italy’s new leaders are flexing their power in a way that appears almost to force themselves into a clash with the EU.  

Key Quotes

“A new election is likely to be held in coming months.   Lega and M5S have challenged the Italian President’s power to veto its ministers if they present an anti-EU or anti-Euro-membership stance.”

“The Lega/M5S leaders may claim they do not want to leave the Eurozone, but by demanding their economic minister, it appears they want to implement policies, debt-financed fiscal spending, that have virtually no chance of being accepted by core EU members.”

“It is a stance on demanding the capacity to implement policies without EU interference.   In an election campaign, they have set up the EU to be their straw-man to attack.   Any claims that they want to stay in the Euro will sound insincere.   They appear likely to win a new election with an increased majority.   Once they do form government, they will answer to the people if they then turn moderate and accept EU rules in return for its financial aid and support from the ECB.”

“Their fiscal platform –  including rolling back pension reform;  a universal income to support the poor; broad income, company and VAT tax cuts; and a range of social spending initiatives –  are arguably the most fiscally irresponsible, likely to cause a blowout in long-term budget spending in Italy; unacceptable to core EU leaders.”

“The market is again forced to contemplate a prolonged crisis in Italy, the Eurozone’s third-largest economy.   Whether this is an existential threat for the Euro or not, economic and political chaos in Italy would have broader implications for the region’s economy and financial markets.”

“As such, there is now much greater potential downside for the EUR and European assets.”