Italy’s new crisis ‘too much’ for Europe to handle: Latvia FM

Italy’s political turmoil could rattle Europe harder than the Greek financial crisis and the Brexit vote, Latvia’s finance minister says.

A week of political turbulence in Italy witnessed dramatic repricing of the country’s assets and has triggered fears of market contagion across the entirety of Europe.

Asked during a panel discussion in Paris Wednesday if the recent market activity could eventually impact growth, Latvian minister Dana Reizniece-Ozola was unequivocal.

“Definitely,” she said. “I think we can see what an impact Brexit has already caused to the EU in general, and if Italy fails to form a government that might be still pro-European and still dedicated to the reforms and getting the country back within the fiscal stance, that might be a bigger harm to the whole of Europe.”

Italy’s financial situation was already a major point of concern for the 28-member EU bloc. Its growth is anemic, unemployment is high at 11 percent, and its public debt is 132 percent of gross domestic product (GDP) compared to the euro zone’s 87 percent — making it the fifth-most indebted country in the world and the second in Europe, after Greece.

Speaking to CNBC’s Joumanna Bercetche during the panel at the Organization for Economic Cooperation and Development (OECD), Reizniece-Ozola said, “We could handle Greece, we could and will handle Brexit … Italy will be too much I think.”

Euroskeptic politics

Ever since elections in March that saw two populist and euroskeptic parties perform well — the Five Star Movement (M5S) and the far-right wing Lega — markets have become even more worried thanks to pledges by the parties’ leaders to cut taxes, increase public spending, and essentially ignore EU fiscal rules. EU officials have been calling on the parties’ leaders to remain in compliance with the bloc’s fiscal framework.

Tensions between pro-EU establishment figures and those skeptical of the European project came to a head over the weekend after Italian President Sergio Mattarella vetoed Lega and M5S’s pick for economy minister, Paolo Savona, because of his anti-euro views. The move, which prevents M5S and Lega from being able to form a coalition government, has triggered a constitutional crisis and could prompt fresh elections that could take place as early as July.

Investors fear this could usher in an even stronger victory for populist and anti-euro agendas, as a new election risks serving as a referendum on Italy’s existence within the EU.

‘Too much’ to handle

The market panic on Tuesday — which saw Italian bond yields spike to their highest level in years and all major markets down, including the Dow Jones and S&P 500 — has planted fears that a financial downturn could seep through the rest of the 19-member euro zone and beyond, rupturing Europe’s growth and even forcing the Federal Reserve to hold on its rate hiking plans. This week saw the euro hit its lowest point in more than six months.

Source: CNBC

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