what is going on in Italy

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mr friendly guy
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what is going on in Italy

Post by mr friendly guy » 2018-05-31 11:42pm

Even over here we are hearing thoughts that the Italian political crisis has affected our stock market, could cause the next financial crisis, Italy is the next Greece (but worse) etc. It all relates to the instability in Italian politics (although I am pretty sure compared to Australia, Italian politics would be considered unstable given how often they change governments). Add in the the fact that anti Euro parties might win and we have interesting times.

An economist opinion with an Australia perspective
Italian nightmare: A crash will cripple the world
ITALY is in crisis. And calls for it to leave the euro could cripple the global economy.

Jason Murphy@jasemurphy

REMEMBER the pain inflicted on the world by the Greek debt crisis? It wrecked the economy of most of Europe, caused our dollar to fall and made our stockmarket plunge.

Now Italy is the concern — Europe’s nightmare scenario. If Greece was a sardine, Italy is a whale. Here are some comparisons: Greece’s economy is less than one-third as big as Australia’s. Italy’s is 1.5 times larger.

That’s why the potential for crisis in Italy is already making massive waves. Stock and bond markets have already fallen around the world. The crisis might not come to pass, but if it does, all hell will break loose. That will be bad news for Australia — we have enough to deal with given rising unemployment, risks in China and the implications of a cooling housing market.

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.

But one problem at the March election was that several different parties all got a share of the vote. Nobody clearly won. (A bit like when Abbott and Gillard tied the 2010 election and there was a long period of uncertainty where we didn’t have a government.)

Italy surfed along with no government for three months until this week, where the political crisis reached a point where their dramas spilled over into global economic markets.


The trouble arose because the anti-Establishment parties (not only the Five Star Movement but also a more right-wing one called the League) are growing in prominence and they don’t exactly love the EU, or the euro.

People feared Italy could then have a referendum to leave the EU. This is like Brexit, but super-sized, because Italy uses the euro and the UK doesn’t.

And if Italy stops using the euro, things could get ugly.

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.

(Would it work to just set all the debt in lira? It would be easier for Italy to pay. But then the person at the other end takes the risk of the lira collapsing. Given that the person on the other end is probably a big bank, this idea may well cause bank insolvencies and a financial crisis.)

Legendary investor George Soros weighed in to say that the situation was worse than people imagined.

“It is no longer a figure of speech to say that Europe is in existential danger; it is the harsh reality,” he said.

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.

As we all remember from the Gillard years, minority government is hard - there could soon be another eruption of trouble in Italy.

And that might be bad news for those of us who want a stable Europe.

Jason Murphy is an economist. He runs the blog Thomas the Think Engine.
Hey Australian news are going away from the China hard landing causing problems for Australia narrative. Its now European Union woes that are going to hurt us. Good to know. :lol:

So for the Europeans, is it that bad? If Italy leaves the Euro, it might be the big geopolitical event of this year along with America's pseudo trade war.
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Re: what is going on in Italy

Post by AniThyng » 2018-05-31 11:55pm

I begin to see why proportional representation is not a magic bullet for democracy...
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Tribble
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Re: what is going on in Italy

Post by Tribble » 2018-06-01 12:16am

Meh. This isn't much of a surprise; Italy has been a mess both economically and politically for a long time. My predicition is that (as usual) Italy and the EU will eventually figure out a way to kick the can down the road for a couple more years, but without really fixing the underlying issues. This is more or less par the course for Euro affairs.
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Re: what is going on in Italy

Post by Tvpnbb » 2018-06-01 12:24am

AniThyng wrote:
2018-05-31 11:55pm
I begin to see why proportional representation is not a magic bullet for democracy...
The current Italian election system is not fully proportional, it's a mixed system with 37% of seats allocated using first past the post and 63% proportionally. Also note that the process to a degree worked as it should - two parties agreed to form a coalition and a government has been formed.

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His Divine Shadow
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Re: what is going on in Italy

Post by His Divine Shadow » 2018-06-01 05:39am

Tribble wrote:
2018-06-01 12:16am
Meh. This isn't much of a surprise; Italy has been a mess both economically and politically for a long time. My predicition is that (as usual) Italy and the EU will eventually figure out a way to kick the can down the road for a couple more years, but without really fixing the underlying issues. This is more or less par the course for Euro affairs.
Yea when you get down to it it's the same crisis popping up again and again.

The euro is designed so it punishes all countries who aren't Germany, we all need to become efficient exporters or part of the german export chain. Countries like France and Italy with more focus on domestic consumption are ill suited to the euros rules. Though the euro has hurt Finland too, a supposed efficient northern exporter. So I wonder if the euro only works for Germany and nobody else.

The only way the euro can work is full financial integration and transfers. And that ain't never gonna happen. So really the only solution is stalling until the eventual end must come. The headstone of the euro will read "was dumb, didn't die soon enough"
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K. A. Pital
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Re: what is going on in Italy

Post by K. A. Pital » 2018-06-02 03:37am

It's the same thing delayed, HDS is right.

And until people get their heads out of their asses and stop kicking the debt can down the road, nothing can be done here.

Maybe the whole thing would just collapse, finally - would be funny since so may bullets were dodged over the last 7 years. But capitalism is crisis-prone. You can't have two deaths but one is inescapable.
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