Italy is known for its magnificent scenery, extraordinary art, great food and terrific wine. It’s also known for its stagnant economy and dysfunctional politics.
Government debt is 132% of GDP (vs. around 100% and growing in the U.S.) and the European Commission was actually thrilled to see GDP grow at 1% this year, which they called an “acceleration.” (From what, you might ask.)
The country has had more than 65 governments in the 73 years since World War II ended. Attempts to form the latest one started a mini-crisis early this week.
Sergio Matarella, the country’s president—a largely ceremonial position—refused to accept a finance minister picked by the prime minister in waiting, Giuseppe Conte, who had been chosen after months of negotiations by a coalition of the far-right, anti-immigrant League and the populist 5-Star party. The two anti-Establishment parties pulled off a stunning upset when they won 50% of the vote in March’s parliamentary elections.
Matarella’s move threw markets into turmoil Monday, even though it delayed the formation of a profoundly anti-European Union government that actually might begin to move Italy out of the European Union and euro (call it “Itexit”).
On Tuesday, the Dow Jones Industrial Average plunged nearly 400 points and the Standard & Poor’s 500 index lost more than 1% of its value.
But then something strange happened.
On Wednesday, the S&P gained back all it had lost and the Dow got almost all the way back. Both bounced around the rest of the week as news about a new trade war drove stocks down while Friday’s surprisingly strong jobs report—223,000 new jobs in May and an 18-year low unemployment rate—caused them to rally again.
Fact is, there’s so much news about so many things that each issue quickly gets drowned out as one “crisis” replaces another. Every single bit of “bad” news seems like the end of the world—until the next catastrophe happens.
And when investors heard the word “Italy,” they automatically thought about the Euro zone crisis of 2011 and 2012, when Greece, Spain, and Italy all seemed on the brink of default, and the EU and common currency appeared ready to unravel.
We’ve come a long way since then. Greece has actually reduced its total debt load over the last few years. Spain’s economy has rebounded strongly. And Italy? Yes, its banks are still fragile and its politics dicey, but short of a continent-wide financial crisis, it’s far from default. What if it leaves the euro? Well, the UK is preparing to leave the EU and global stocks have rallied, not declined, since the Brexit referendum.
On Friday Prime Minister Conte was sworn in and Italy had a new government. The crisis was over, and everyone had moved on.