Euro under increasing threat
Like Brexit before it, the recent Italian referendum has caused chaos. In the wake of Matteo Renzi’s vote on constitutional reform, the prime minister has resigned, Italy has been forced to take stock, and the euro has fallen in value. Now, according to a German business group, the turmoil caused by the referendum result could be enough to endanger the euro.
The head of the Federation of German Industries, Ulrich Grillo, said: “The risks of a new political instability for economic development, the financial markets, and the currency union are increasing further.”
EUR/USD Price Chart (Daily, Last 3 months):
It has caused many to question the likelihood of Italy staying in the Eurozone for the foreseeable future, a prospect that the Centre for Economic and Business Research’s Douglas McWilliams believes has fallen below 30 per cent following the vote.
Mr McWilliams stated: “There is no doubt that Italy could stay in the euro if it were prepared to pay the price of virtually zero growth and depressed consumer spending for another five years or so. But that is asking a lot of an increasingly impatient electorate.”
And they are not alone in voicing their concerns – Germany’s foreign minister has also expressed doubts following the decision, stating that although the result was not devastating, it still wasn’t a positive development towards the general crisis in Europe.
The markets have reflected such sentiments, with the euro falling to a 20-month low against the dollar following the referendum result and Prime Minister Renzi’s resignation. This saw the currency drop to $1.0505 at its nadir, its lowest level since March 2015. Although it has since risen, economists have warned against premature optimism, stressing that business confidence in Italy will almost certainly be negatively impacted by the inevitable political uncertainty, and continuing struggles within the banking sector.
However, as to the knock-on effect that this will have in Europe, many commentators are unperturbed. Jean Asselborn, foreign minister for Luxembourg, is amongst them. He told German news agency DPA: “Italy voted on a reform. It would be wrong to extrapolate that now to the European level. It was a domestic political argument.”
Only time will tell whether such a prediction proves true.
Trade EUR Pairs Now: