Italian election: is the euro under risk?

Italian election is supposed to create volatility of the euro in the next month. The election is appointed on March 4, but talks about its destroying effect on the euro have already started.

The opponent of the government under the guidance of Paolo Gentiloni is a new-formed center-right coalition that consists of Mr. Berlusconi's party Forza Italia, Mr. Salvini’s party Lega Nord, and national-conservative political party Fratelli d'Italia.

Nowadays, there is discordance in a coalition on a key issue of participation of Italy in the European Union, that will create volatility of the euro. A leader of the Italian party Lega Nord, Matteo Salvini, is ready to leave the European Union and the Eurozone unless Brussels changes the current treatment Italy receives. He wants fewer constraints from the European Union. At the same time, other allies do not consider the exit from the EU.

The European issue is not the most important in the Italian election. The percent of Salvini’s party in the coalition even if the coalition wins, is not so big, it means that he will not be able to find support in a parliament and bring Italy to the exit. However, talks about the exit will affect the euro during the pre-election period.

Another important issue is the strength of the government. Nowadays, the Italian economy is the third-biggest economy of the Eurozone after Germany and France. It means that any changes in its policy affect not only the country itself but the Eurozone as well. The important issue is that the ECB is planning to reduce its stimulus. It can cause a burst of market volatility, that will lead to more expansive borrowing for Italian government from capital markets. Such risks can spread to other countries included in the Eurozone. If the government is weak and does not support the European Union, it will create problems for the EU and the euro as well. The EU needs the strong government that will be able to enact new laws and support its policy.

To sum up, we can say that the possibility of the Italian exit from the European Union and the Eurozone is low. However, the Italian election will affect the euro and Forex market in general. Talks about the Italian exit and dissent in the coalition will create the euro volatility, so Forex traders should be more careful during the pre-election period.