Why Italy matters to the eurozone


I have no idea how the Italians are going to vote when they hold their snap elections, nor do I intend to learn too much about it.

But what I do care about is the impact the vote may have on the eurozone.

Italian President Sergio Mattarella is under pressure from a powerful alliance of populist parties, some of which would be happy to have Italy bolt from the European Union

Mattarella has called a snap election after an inconclusive election in March. Many view the next vote as a referendum on the euro.

An Italeave result is a very different situation than that of Brexit, in my opinion.

 

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Currency Risk

The reason: Britain’s vote to leave the eurozone in 2016 had no impact on the actual euro currency. An Italian exit might, in my view.

Britain never adopted the currency, and instead stuck with the pound.

But if Italy were ever to vote to leave the eurozone,  it also means the exit from the currency, and the printing of the lira once again.

 

German Economy

In my opinion, Italy would no longer feel the benefits of a robust German economy giving the Italians the benefits of a strong currency.

I find it hard to believe that any country would leave the euro. The Greeks were the prime candidate on many occasions and instead opted to stay within the single currency.

In my view, the ramifications of leaving the euro are too high and too steep to risk such a thing.

 

Painful Exit

Additionally, the EU would make the negotiations between them and the UK look mild by comparison.

That is not even speaking of the inflation ramifications, and how the market might reprice Italian debt, making it hard for the heavily indebted country to issue new debt.

Additionally, there would be no ECB to backstop them; it would not be a wise move.

But the notion that the Fed was going to tighten interest rates three times in 2018, just went out the window, in my opinion.

Italy tensions may also cause the ECB to change their game plan as well, regarding putting an end to its quantitative easing program, or QE.

 

Takeaway

I think this serves as a reminder to all those who forgot the risk of buying 10-year Italian bonds, or German bunds for that matter.

It is by no means over, regarding Italeave.

I suspect we will soon be monitoring polls, while the uncertainty acts as a drag on the euro currency, and likely pushes US yields lower.

Photo Credit:  Nick Kenrick via Flickr Creative Commons

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Mott Capital Management, LLC
Mott Capital Management, LLC
Mott Capital Management uses a long-term thematic growth approach to investing in equities. We search for investments that both reflect and help to shape generational and demographic shifts. Mott uses a philosophy of buying these companies for a 3- to 5-year time horizon, with the belief that a long-term holding period gives themes and our chosen companies a chance to fully develop. In our view, the long time horizon also serves to mitigate the risk associated with the short-term impact of market volatility.