European Strategist Chris Bailey discusses Italian politics and the euro's recent drop.
“Failure is simply the opportunity to begin again, this time more intelligently.” – Henry Ford
Italy. Just when you thought it was all over, a dramatic final twist threw everything back up in the air, and a surprise leader emerged. But enough about this year's Giro d'Italia cycle race and back to the well-trodden area of Italian politics.
Thinking back a couple of weeks, my broad conclusion was that if a populist Italian coalition emerged, then so be it. The recent historic travails of Greece's populist ruling party, the reality pressures of the fixed income markets and – hopefully – some combination of anti-corruption efforts and lower taxes from the populist coalition, together with a positive and engaging reform summit in late June led by Angela Merkel and Emmanuel Macron, would provide some kind of European investment opportunity.
However, last weekend's annulling of the populist dream by the Italian President, irked by the anti-euro personnel choice for finance minister, was, in my opinion, a poor move. This is certainly within the constitutional remit of the President, but there is a deeper backlash risk now from an electorate already suffering from an inability to believe. A technocrat sticking plaster for the next government – headed by a former International Monetary Fund official nicknamed “Mr. Scissors” for his budget cutting preference – is certainly more palatable for the markets, although politically unsustainable. I would have stuck to the plan outlined in the paragraph above: look to inspire through positive action, working with whomever can put together even a potentially unstable coalition. Net result: bond spreads pushed out to levels not seen for a few years, market contagion, and – surely – an early autumn election.
So whilst Rome fiddles, regional financial markets relatively burn, with the euro down to levels last seen late last year against the U.S. dollar, the last weekly regional outflow data the worst since a couple of weeks after the Brexit referendum result, and Italy's stock market now down in year-to-date terms. Even famous financial speculator and philanthropist George Soros was moved to say “the EU is in an existential crisis. Everything that could go wrong has gone wrong … it needs to reinvent itself.”
I certainly agree with the latter point, which naturally brings up the summit in a month's time, a subject on which both Macron and Merkel have uttered the “reform” word in recent weeks. Of course words are cheap, but the instinct is correct, and the need to inspire leadership is key. The start of the fightback should begin with the positioning and rhetoric around the newly unveiled 2021-2027 European Union budget. The aforementioned George Soros may have been unhappy about the revisions to fund allocation for his native country of Hungary – among other central and eastern European lands – but the instinct to allocate more funds to countries like Greece, Italy and Spain makes economic and political sense. To build confidence, both reality and money talks, and the European Union is in dire need of a bigger regional redistribution policy, just as other single-currency zones (such as the United States) have. Stage two is the summit. Time to channel some of the underlying emotions captured in the Henry Ford quote above. Macron is certainly intelligent enough to see the challenges – and you would have thought a “legacy mode” Merkel would be having similar thoughts.
Chris Bailey is with Raymond James Euro Equities, an affiliate of Raymond James & Associates, and Raymond James Financial Services. All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets.