After some years of economic expansion and calm financial markets, the clouds are gathering over the eurozone again.
This week, fears over a reawakening of the euro debt crisis riled financial markets , as political stalemate in Italy could trigger new elections with an extended period of political uncertainty (see Flash Comment - The Italian market panic and near-term outlook , 30 May). Italian 10-year yields saw the biggest increase since the euro debt crisis caused havoc in financial markets in 2011/12. While things calmed down towards the end of the week, the markets are still very nervous and we see a risk that the sell-off in Italian bonds could flare up again on any renewed uncertainty.
On the positive side, a new Italian government was put in place on Thursday , as the Five Star Movement and the League managed to form a government. However, it remains to be seen whether the new government will be on collision course with the EU and rating agencies. This could happen if they stick to an expansionary budget and backtrack on structural reforms. Economist Giovanni Tria took the key position of Finance Minister. He has expressed the need for reform of the euro system but it is still unclear what he will put forward. The controversial Paolo Savona, who the President rejected as Finance Minister, will be Minister for EU Affairs.
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