Italy is back in the news and it has nothing to do with the impending World Cup. In a country with anything but a stable political system, Italy appears ready for yet another election after finding out that electing outsider politicians with no real experience does not actually make things better.
The news sent world markets down as everyone suddenly remembered that Italy has more debt than they have roma tomatoes and they have not done much to change that since the European Crisis nearly 5 years ago. New York markets were down between 1 and 2 percent. European markets were down just as much. Let’s everyone panic! Or maybe not.
Italy is a beautiful country with lots of history and some incredible companies. It is also the 8th biggest country by nominal GDP in the world slightly ahead of the Great White North. By 2030 Italy is forecast to be maybe the 13th largest by nominal GDP. Canada? It is forecast to remain in 10th spot. Italy is essentially a product of the past and the influence it holds on the world economy is shrinking relative to places like India, Brasil or Indonesia. What is all the fuss about then?
Well it all goes back to the EU, an economic union of disparate countries that somehow has turned into Frankenstein’s monster because no one could envision that Southern Italy would not be exactly like Northern Germany. It was a great idea (no trade barriers between countries) that was sewn together with a common financial metric and an overseeing political organization that answers to no one. I am sure Dr. Frankenstein thought his creation would be wonderful too.
So why does Italy matter to you? Well the short answer is it absolutely does not matter. You probably do not own any Italian bonds or even Italian stocks. More importantly, Italian governments change on a nearly annual basis so this “crisis” will too pass.
The long answer is more complicated for you. Let’s go down the rabbit hole a bit on this. If we assume Italy hits a major financial problem and defaults on some debt payments, well it is likely their bonds will drop in value across the board and the stock market will drop too. European markets will also get hit on this because they all own pieces of each other because; mi bondsa es su bondsa.
That all transfers in the short term to the rest of the world because our financial system and our large corporations are intertwined. Globalization is a positive over the long run but it does sometimes mean we have to feel some pain not of our own doing. Of course I did say “short term” for a reason. The long term situation is mostly difficult to predict because how this impacts other countries is entirely unknown. Does an Italian bond default cause a Greek bond default or the failure of a major French bank? Those are the steps that happen when you have real contamination and real problems. Italy defaulting (or any other single small country) by itself is fairly simple, it is whether that spreads to other areas that should be on your radar.
Of course no one knows how or when this may happen. It could never happen and I will have written this blog post for no reason. More importantly, no one knows WHAT will happen if we have something happen to Italy. This is why it pays to not succumb to wild gyrations based on politics. It pays to have a plan to deal with these opportunities when they are presented but to generally be agnostic to them when planning for your life. Italy won’t matter until it matters but prepare yourself to handle it no matter what happens.
(Source: Luca Bruno- Associated Press)