the Italian nightmare: A crash will cripple the world

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https://www.news.com.au/finance/economy/world-economy/italian-nightmare-a-crash-will-cripple-the-world/news-story/49cef29aa17833eb4417a55bc15eb648

WHAT’S WRONG IN ITALY

The drama starts with politics, and bleeds into the economy. Italy had an election in March and it went down the Trump path, voting for candidates who are furious and want to shake things up.

The big winner was a party called the Five Star Movement. The Five Star Movement — founded by a charismatic Italian comedian, and with a leader aged just 31 — came out of nowhere. It stands for a fascinating mix of left-wing environmental and social policies plus an anti-immigration stance and suspicion of the EU.

That’s all fine for a democratic state. Italy is definitely not going well — unemployment is over 11 per cent. It needs reform. Italians have every right to vote for change.


SO THEY GO BACK TO THE LIRA. HOW BAD CAN IT BE?

Bad. Leaving the euro will almost certainly cause a disaster.

The minute Italy gets its own currency (assume they go back to the lira) they have an exchange rate with the euro. You can bet the lira to euro exchange rate would suddenly crash. The lira will be worth a lot less. The debts Italy built up in euros suddenly look even bigger.

Imagine I owe you $US100 but I get paid in Aussie dollars. While you’re waiting for me to pay, the Aussie dollar falls. You realise I now need to earn $A200 to change into USD to pay you back. You begin to doubt I will pay up.

That’s the situation Italy would face if its currency crashes. People are already pretty sceptical about whether Italy can pay back its enormous debts and if they get bigger overnight, well, Italy might just default on them.

WHAT IS NEXT?

Europe has a funny way of muddling through. Overnight a new Prime Minister was appointed in Italy in an attempt to stave off economic crisis. The man appointed, Giuseppe Conte, was not leader of either of the two populist parties who were causing such concern.

But clearly there’s still a huge divide in Italy, with many Italians frustrated with immigration and being forced to stick with Europe-centric policies. A minority government of political novices is a highly combustible thing, and might not make it through an entire term.