A row between Italy's president and its would-be government has raised the prospect of fresh elections in country in the near future. There are fears that that could essentially become a referendum on Italy's membership of the euro - and the European Union - which has brought fresh nerves to European markets.
"The Italian issue has raised the issue again of the euro zone and euro zone membership," said Eugene Kiernan, head of investment strategy at Appian Asset Management. "We've had political crises in Italy before, you've had 60 changes of government since 1945, but I guess the focus this time is on the euro zone and certainly membership of the euro. That's been the issue that the two parties have brought to the fore."
That has made traders nervous about the direction of the country - and the region - which is taking its toll on the markets. "The biggest impact has been on issues like currency but also on domestic assets in Italy," he said. "We've seen Italian stocks move about 10% off their height but more important Italian bond yields have moved up. "Currently Italian bonds are about 2.66% while in comparison German bonds are 0.3%."
That could have an impact on other countries' bond yields too - especially those that are heavily indebted - though Mr Kiernan suggests that Ireland is in a very different space to Italy in terms of the shape of its economy and its current trajectory. "The issue is that it brings back on to the table the question of the overall euro zone membership," he said.
Both the Five Star Movement and Lega in Italy have taken advantage of the public's doubts about the European project - though it remains to be seen whether they will actually take dramatic steps, like leaving the euro, once they actually take power. That is because nothing has actually happened yet in Italy - partly due to the country's president blocking the formation of a government. That delay is part of what is souring markets, however.
"The fact that we won't get any resolution on this in the new term is a problem," said Mr Kiernan. "We're probably looking into a three or four month period where the [anti-euro] rhetoric is falling on fairly fertile ground. In Italy, 66% of the population is in favour of the euro, but that's the lowest off all the euro zone members. The other thing is, in terms of the experience the Italians have had since the euro, they've actually seen disposible incomes fall, and that's different from other euro members. When you add in issues like migration, it becomes easy for the rhetoric to be scaled up."
For the EU this uncertainty around the future of Italy is coming at a crucial time in Brexit talks - with a conclusion to negotiations hoped for in October. "It was always going to be the case that markets would be more volatile than they had been, say in 2017," Mr Kiernan said. "The unusual thing was how calm markets had been in the face of quite a lot of uncertainty, so volatility is going to pick up.
"Brexit is very much a process rather than event but we do seem to be coming towards some kind of a head in the middle of the summer, so I'd imagine we will see some further issues in terms of what the monetary policy in the UK is, whether they're able to go ahead with doing anything on interest rates, and that's what's going to drive sterling in the short-term."
MORNING BRIEFS - Britain's chancellor and its central bank are at odds over the post-Brexit regulation of the financial sector, according to The Financial Times. The UK Treasury is seeking to keep controls closely aligned to EU rules to assure maximum access, however the Bank of England is against any compromise that would leave it a "rule taker". Relations between the bank and the Treasury are "very, very bad" over the issue, the report says.
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