News Analysis: Italy's political woes weakening euro

Source: Xinhua| 2018-10-12 23:33:49|Editor: yan
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By Eric J. Lyman

ROME, Oct. 12 (Xinhua) -- The value of the euro currency has been dropping compared to the U.S. dollar and other major currencies for months. Italy's political turmoil is at least partially to blame, economists said.

The euro has been in a gradual but steady decline against the dollar since March, the same month as Italy's general election. It took 1.25 U.S. dollars to buy a euro then; 1.14 U.S. dollars will buy a euro now. That's a difference of around 9 percent.

Italian government bonds and the major indexes on the Italian stock exchange have also suffered since the March 4 vote that led to the election of a nationalist, populist government headed by Prime Minister Giuseppe Conte.

Even though Italy has the third largest economy in the 19-nation eurozone, its gross domestic product represents only around a sixth of that of the eurozone as a whole. Yet the same worries driving Italian bond yields higher and Italian stock indexes lower is putting pressure on the euro, according to economists.

"Italy is having big disagreements with the European Union on its budget, and with bond yields going higher it costs more and more for the government to borrow money," Franco Bruni, an economist specializing in monetary policy at Milan's Bocconi University, told Xinhua. "Uncertainty about Italy certainly makes the euro less desirable, less robust."

The budget clash between Italy and the European Union which Bruni mentioned concerns the dimensions of the country's budget deficit in 2019, stated as a percentage of its gross domestic product.

The Conte government has outlined a plan that would have the deficit come in at the equivalent of 2.4 percent of the anticipated gross domestic product. European officials called on Italy to produce a 2019 budget with a deficit a third that size.

Umberto Triulzi, a political scientist focusing on global economics at Rome's La Sapienza University, said the weakening of the euro is coming during a period when financial markets have become volatile.

"If the euro is weakening against the dollar, then the dollar is also strengthening against the euro," Triulzi said in an interview. "That is despite the fact that the situation in the United States has been unpredictable for two years and will continue at least through the mid-term elections there" in November.

"The era of [U.S. President Donald] Trump has been confusing, both in terms of monetary policy and because of the tariffs on goods from China and other countries," Triulzi said.

In some ways, a weak euro can be welcome news for an export-driven economy like Italy's, since it makes goods produced cheaper in markets beyond the eurozone. But Bruni said the current situation continues, the negative aspects will outweigh the positive ones for Italy.

"If bond yields continue to rise that will make it harder for Italy to pay down its debt and a rising debt level will create more nervousness, which will make bond yields go still higher," Bruni said. "If the government does not get things going in the right track, it won't take too long for the costs to become unsustainable."