S4 Ep20: Director’s Cut: What risk does Italy’s new government pose to the euro area?

The coalition agreement between Italy’s Five Star Movement and
the League puts the country’s new government on a potential
collision course with the European Union, and has prompted fears
that the country could nosedive out of the euro zone.


Markets have already born witness to investor nervousness over
the coalition’s proposed agenda, and the new government’s
priorities run counter to the prevailing fiscal and monetary
policies of the euro area. If Italy were to follow through on its
new plans for spending, the expected reaction in among
bond-buyers would make it very difficult for Italy to finance its
already-significant amount of public debt.


Any discussion of a possible default necessarily involves the
euro area – as Bruegel’s database of sovereign bond holdings
illustrates. Just how exposed are the other members of the
currency bloc, and what paths might be taken in order to avert a
crisis?


In this week’s Director’s Cut, Bruegel senior fellow Francesco
Papadia joins Guntram Wolff to assess the problems that currently
occupy both Italy and the EU.


For further reading, note Guntram Wolff’s article on why Europe
needs a strong Italy, whoever is leading the government.


Also consider looking at Jean Pisani-Ferry’s opinion piece on the
opportunity that such political upheaval might offer Italy to
overcome its longstanding internal issues.