Italy is the third largest power in the Eurozone, behind Germany and France, and an important part of the EU. It is also the third largest debtor among advanced economies, but the country has undergone a lot of political changes recently, with prime minister Matteo Renzi the latest to go.
After a crushing defeat in a national referendum regarding constitutional reform, Italy is now without a government with its banks in a dangerous position. These elements are all adding up to push the country closer to leaving the euro behind in an effort to restore financial order.
The Italian constitution does not allow for a referendum on leaving the euro, and with the recent defeat for the government in a referendum to make constitutional changes, it may not look like Italy will be leaving the euro any time soon. However, that doesn’t mean that a new government itself cannot make and enforce a decision to leave the euro.
After the announcement that Matteo Renzi would be standing down, the euro dropped to a 20-month low against the US dollar. As well as being bad news for the EU, it is arguably worse for Italy as a weakened euro restricts their buying power even more. This could lead to the country seriously considering dropping the currency.
Five Star Movement
Italy’s Five Star Movement are in with a chance of seizing power in the next election and some members of the party have already stated that a possible exit from the single currency could be on the cards if they do. Many analysts believe the party has a real chance of winning.
Should they do so, then an exit from the euro could be likely and followed by leaving the EU. It would be a complicated process, especially if they wanted to hold a referendum on the issue, but if they do come to power then it could be the beginning of the end for the euro and Eurozone.
Impact on the Currency
If Italy withdraws from the euro, then it will have a big effect on forex brokers like SucdenFinancial. Already it has weakened with the resignation of Renzi, while the uncertainty surrounding the next few months will do little to restore its position. Should the country drop the currency then, much like in the wake of Brexit, it will fall in value once more.
The next few months will be pivotal in seeing where Italy decides to go regarding its currency, so all forex traders should keep a close eye on the country and news surrounding it.
Cover Image via Will Spaetzel