Italy is the biggest political risk in Europe: Analyst


However in Italy, polling data shows there is little support for the euro and if a referendum were called then many would be voting to leave the euro.

“That could be potentially disastrous for the monetary union, for the European Union. You can’t just leave the euro and not leave the EU,” she explained.

Ramakrishnan’s concerns about Italy have been echoed elsewhere. Fabio Fois, a Barclays economist, says Italy risks political paralysis if it cannot approve a better voting system ahead of next year’s election.

“As the current government seems to have little of the political capital needed to press ahead with meaningful supply-side reforms, we expect Italy to continue to underperform peers, until political prospects for the formation of a stable pro-reform coalition government improve,” he said in a research note published Tuesday.

“Therefore, Italian sovereign risks are likely to worsen in the months ahead. The situation may not necessarily end in a full-blown crisis as in 2011, but it will require meaningful political and policy change.”

The yield on Italian 10-year government debt has increased from around 1.5 percent to 2.1 percent over 12 months. The yield spiked to above 2.5 percent in mid-March.

Wolfango Piccoli, co-president of Teneo Intelligence, warns the most likely outcome of the next general election is a hung parliament.

“There is a significant chance that no agreement will be reached on a new electoral law, thereby forcing Italy to go to the general elections with the current different electoral laws (basically proportional representation albeit with different rules for the two chambers) for the chamber of deputies and the senate,” he said in a research note on Monday.

“As for the timing of the next general elections, our base-case remains that Italy will go to the polls in the spring of 2018, after the end of the current parliamentary term. The likelihood of snap elections in the autumn of this year is only 25 percent.”

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