A global stock market selloff may be sparking a new crisis throughout Europe, fueled by concerns regarding the stability of Italy’s government. On May 29th, the DJIA dropped 400 points, shares in Asia dropped sharply, and the Euro fell to a ten month low against USD. Though there was some recovery, the future remains uncertain.
Italy’s economy is the third largest in the Euro-zone. It has been experiencing financial issues during the past few years, with debt at 130% of its growth. Political issues have made many wary about the country’s future, as the populist politicians were unable to form a stable government following the election. New elections are likely to occur in the coming months, possibly as soon as July.
In March, Italian citizens voted in their general elections but created a split government, which ultimately led to a hung assembly. None of the political groups in Italy were able to obtain a simple majority. Currently, there is a stop-gap government, which does not have the approval of many of the political parties, and has limited power.
All of this creates a situation in Italy that is rife with uncertainty. It is not known how the next elections will work. And without a government, Italy cannot properly budget or manage its debts and income. If the next elections also fall through, Italy could be without much more than a provisional government for some time.
At this stage, much of the European Union is concerned about the potential future of Italy, as it will have a tremendous impact on the EU as a whole. A chief concern is that foreign investors may begin to flee from the area, which could lead to an even stronger economic crash. Even investors inside of Italy may begin to pull back on spending, and businesses may refrain from growth during this time. This could ultimately lead to either a recession or a depression, as money stops moving and lending becomes expensive. The economies of all the EU countries are closely entwined due to travel and trade.
As the political crisis unfolded, Italian stocks and bonds were dumped, and the yields on Italian government bonds dramatically increased. A 10-year government bond jumped to 3.10% from 2.69%, when the yield in May was 1.78%. Expensive money generally leads to stagnation across a country, which can have long-standing economic impact.
Investors as a whole are no longer confident in the government of Italy, and this did not impact Italy alone. France, Britain, and Germany were all impacted by Italy’s political issues and will likely find it more difficult to recover from these economic problems than the United States and other, more distant, countries. Spain is currently experiencing other problems,with a vote of no confidence currently being held by the parliament; the Spanish index fell 2.5%.
In the United States the stock market was able to rebound quickly, in large part due to a surge in oil prices. Many believe that the initial market sell-off was an overreaction on the part of investors, but at the same time, analysts cannot promise that a similar (or worse) situation might not happen should the problems in Italy become more dire. If the European Union as a whole is impacted, investors will likely see a significant dip in the market, as well as shifts in the valuation of the Euro against the dollar.
The United States is not as directly impacted by the Italian political process as the rest of Europe, but this has only contributed to a large feeling of global unease. With new trades being negotiated, tariffs being levied, and the landscape of importing and exporting being altered, many investors are not certain what the future is going to hold.
Tense negotiations between the United States and China are also contributing to global economic uncertainty, and compounding the problems that are now facing Europe. Altogether, investors need to be cautious when entering into investments that are going to play out on a global scale.
Regards,
Ethan Warrick
Editor
Wealth Authority
