Italian Election Results Threaten Economic Collapse in Europe

The political scenario is complex at best, but while stock exchanges appear to have ignored the results of the Italian election (or have already accounted for it), there are plenty of reasons you should be concerned about your investments. A stock market crash in the short term is likely, and much bigger dangers lurk in the longer term.

On March 5, Italy and the world woke up to discover that the untested Five Star Movement (M5S) and a much stronger League (formerly the Northern League) had won the parliamentary election. Many believe, though some dispute, that both parties express right-wing positions, but there’s little doubt that both parties express populist ideas.

The Right may have just inflicted the biggest political defeat of the Center and Left in Italy since World War II. The Center and Left (or what passes for it) failed to consider the issues and concerns that most Italians worry about. They pulled a Hillary Clinton. Mercifully, the Italian media, academics, and pundits have not blamed Vladimir Putin and Russia or any other outsider, even if there’s plenty of blame that belongs outside Italy.

ECB Is Only Barrier Between Salvation and Disaster

Now, perhaps the only thing that stands between salvation and disaster for Europe is Mario Draghi and the European Central Bank (ECB). When Draghi leaves his position in 2019, the European Union (EU)—especially its southern members, the so-called PIGS (Portugal, Italy, Greece, and Spain)—will see the end of quantitative easing. The ECB’s policy of buying Italian treasury bonds has allowed Italy to survive the financial burden of its public debt.

Once that’s over and interest rates pick up again, Italy could go the way of Greece. A populist, anti-EU party in power may allow it to happen, and the consequences are unknown. The markets may well start to address this risk sooner rather than later.

Don’t let Wall Street’s performance fool you. Yes, on March 5, there was no stock market crash. But that’s because, given the structure of the Italian political system, elections are just a guide. As in many European countries, when there’s no clear and outright winner, negotiations are necessary to form a government. In short, the name of the next prime minister is not yet known.

That’s where we find the first problem: the uncertainty. How long will it take to form a government? The efficient Germans have only finally decided to form a (fragile) coalition, five months after their vote. In Italy, there will be efforts to avert a purely right-wing government, with strange bedfellows coming together in precarious formations. One of the most likely scenarios surely involves a return to the polls in short order.