The most important thing to remember about Italy is that it is not Greece, for the following reasons:
- Italy has a much larger economy, and is much more important to the EU;
- The Greek crisis was essentially a Third World debt and hot money issue caused in part by the euro and exacerbated by the inability to devalue, as, say, Argentina would under similar circumstances. Italy’s problems are chronic, and were not caused by the euro. Getting rid of the euro will not make them go away, but would cause unimaginable short-term pain.
- The Germans have far less control over the EU today than they did in 2015. Bailouts, however, are no more popular now than they were then.
So where is this going? Here’s my fearless prediction:
- The new government will not propose to get rid of the euro, but will run much larger deficits;
- Interest rates will go up substantially, but not to Greek levels;
- The EU will not take any effective action to bring the government to heel. On the other hand, there will be no bailout, either; and
- Ultimately, the Italian people and the government will have to decide whether the pain of significantly higher interest rates is worth it.