Director’s Cut: What risk does Italy’s new government pose to the euro area?

The coalition agreement between Italy’s Five Star Movement and the League puts the country’s new government on a potential collision course with the European Union, and has prompted fears that the country could nosedive out of the euro zone.

Markets have already born witness to investor nervousness over the coalition’s proposed agenda, and the new government’s priorities run counter to the prevailing fiscal and monetary policies of the euro area. If Italy were to follow through on its new plans for spending, the expected reaction in among bond-buyers would make it very difficult for Italy to finance its already-significant amount of public debt.

Any discussion of a possible default necessarily involves the euro area – as Bruegel’s database of sovereign bond holdings illustrates. Just how exposed are the other members of the currency bloc, and what paths might be taken in order to avert a crisis?

In this week’s Director’s Cut, Bruegel senior fellow Francesco Papadia joins Guntram Wolff to assess the problems that currently occupy both Italy and the EU.

For further reading, note Guntram Wolff’s article on why Europe needs a strong Italy, whoever is leading the government.

Also consider looking at Jean Pisani-Ferry’s opinion piece on the opportunity that such political upheaval might offer Italy to overcome its longstanding internal issues.