Why Italian Politics Keep Roiling Financial Markets

Discontent with the European Union is nothing new in Italy. But the arrival of a populist government prepared to channel that disaffection raised fears that the nation could eventually tumble out of the euro, even if by accident. In its first few weeks, the new administration managed to trigger several bouts of market volatility by challenging the EU on issues such as debt and migration, and by appointing euroskeptic figures to prominent positions. There’s lingering anxiety among investors of a self-fulfilling, Greek-style showdown that could upend markets the way the U.K.’s surprise Brexit vote did in 2016.

That’s highly unlikely but not entirely out of the realm of possibility. The two parties that took power, Five Star and the League, say they don’t want to take the country out of the euro. But they assign partial blame to the common currency for Italy having the slowest economic growth in the 19-nation euro area and an unemployment rate that’s only recently dipped below 11 percent. As they worked to form a government, they floated ideas like seeking a 250 billion euro ($300 billion) write-off from the European Central Bank and creating a new class of short-dated government notes specifically to pay state arrears, something critics saw as akin to issuing a parallel currency. Italy’s Democratic Party, which emerged as the biggest loser out of the March 4 vote, has accused the populists of having a hidden plan to pull the country out of the euro.