Italy's coalition government has been generating headlines with its pursuit of populist economic policies that threaten to leave eurozone fiscal rules in tatters. But before EU authorities respond, they should bear in mind that if Italy does not achieve stronger GDP growth, political conditions there could deteriorate further.
Despite political turmoil and emerging risks at the global level, the eurozone has had two years of strong economic growth, at least by its own historically disappointing standards – and even with the United Kingdom lurching toward withdrawal from the European Union. But with the emergence of a populist government in Italy this year, it is no longer safe to assume that the eurozone's worst days are behind it.
Italy was the first country that I studied when I entered the financial world back in 1982, so I have a special affection for it. I was working for a very large American bank at the time, and I can still remember joining frequent transatlantic conference calls to discuss Italy's debt-to-GDP ratio. The question on everyone's mind was when the country would default; but it never did. Instead, Italy muddled through, and has continued to do so ever since. Still, now that the Italian government seems poised for a standoff with the EU, it would not be surprising if worries about a default were to re-emerge.