The Rock of Gibraltar It Ain’t

More recently cracks in the European financial system have taken a backseat to firmer growth on the continent. But problems are simmering just below the surface.

Since the beginning of the decade, problems in Europe have occasionally drifted across the Atlantic. If it’s not Greece, it’s Portugal. If not Portugal, it might be Italy or Spain. And if not Italy or Spain, Brexit briefly created turbulence in 2016.

Enter the dysfunctional nature of Italian politics and the two anti-establishment parties that took top honors in an early March election.

A coalition was eventually formed between the two groups, but the president of Italy rejected a finance minister who has expressed doubt about the euro, which unites much of Europe.

Concerns the government might ditch the common currency led to a massive spike in Italy bond yields and a global sell-off in stocks the day after the Memorial Day weekend.

We could see new twists and turns, but for now cooler heads have prevailed.  Yields came off highs as government officials salvaged the coalition and staved off new elections later this year.

This synopsis is simply a thumbnail sketch of events, but you may be asking, “Why the overview of what is only the latest in decades of dysfunctional Italian politics? Why should I care?”

First, it’s a reminder that Europe’s ongoing financial problems haven’t been solved, and what happens in Europe can sometimes trigger uncertainty among U.S. investors…at least temporarily.

Should you be concerned?

Italians aren’t clamoring to get rid of the euro. If it were to happen, it would have enormous consequences for Italy, which would then reverberate throughout Europe.

We’d likely see a run on Italian banks, as citizens moved cash to safer shores. The collapse of Italian banks would roil the European financial system, and its impact would likely be felt around the globe.

Yes, we are interconnected today. But odds of a “Quitaly” or “Italexit”–financial commentators are once again trying to coin a new term–remain low. Yet now it’s on the radar.

If nothing else, the drama in Italy is simply a reminder that Europe hasn’t solved its financial problems.