ROME — Italy’s political convulsions have raised new fears about the future of the euro, the single currency of the European Union that was introduced 16 years ago.
The possibility, however remote, that a populist Italian government would renounce the euro and revive the lira currency has unnerved many bankers and investors. Stocks tumbled on Tuesday on the fears, and the euro fell against the dollar to its weakest level in six months.
Here is a look at why the fears could escalate into a major crisis, and what it could mean for Italy, the euro, Europe and the world.
Why is everyone talking about the euro in Italy?
Italians have actually been talking about the euro since they began using it in 2002. For years, they have complained that their spending power has diminished under the euro. But the populists who did well in the election also say euro membership has subverted Italy’s sovereignty — an increasingly resonant theme in the country.
What is their argument?
Before Italy adopted the euro, it had the power to raise or lower interest rates to affect the value of its currency — and Italy’s economic competitiveness. A cheaper lira made Italian exports more affordable in other countries, strengthening the economy at home. But under the euro system, Italy — like all members of the eurozone — has no control over interest rates, which are set by the European Central Bank.
What’s changed now?
The two parties that won the March 4 elections, the Five Star Movement and the League, have expressed hostility toward rules that govern the 28-nation European Union and the 19 members that have adopted the euro.
The parties joined forces to form a government. On Sunday, President Sergio Mattarella objected to their choice of economics minister, Paolo Savona, a co-author of a guide to leaving the eurozone, and the attempt to form a government collapsed. But on Thursday the parties presented a revised cabinet, and Mr. Mattarella cleared the path for them to govern.
Though both parties now say that leaving the euro was never on their agendas, they both have a record of flirting with an exit. And it is likely that the next elections, which could be as early as this summer, will amount to a referendum not only on the euro, but also on Italy’s membership in the European Union.
The euro survived Greece’s threat to leave years ago. Why is Italy’s possible exit so important?
Italy was one of the euro’s founding members, and its economy is one of the largest in Europe, dwarfing that of Greece. An Italian exit could cause severe economic disruptions internationally and subvert investor confidence far beyond Italy and Europe. Interest rates could spike all over the world, reflecting a rising atmosphere of risk.
Do Italians really want to abandon the euro and the European Union?
Not necessarily. Italian opinions about the advantages of the euro have ebbed and flowed, as have opinions about the European Union. But many Italians resent what they see as interference in Italy’s affairs by the bloc’s authorities in Brussels.
The euro, on the other hand, has fared better in Italian public opinion, partly because of the financial convenience it has created. “The euro is a tight fit. Italians aren’t happy, but that doesn’t mean they want to go,” said Maurizio Pessato, president of the polling firm SWG.
What do Italy’s politicians say?
The country’s Democratic Party, the biggest loser in the last elections, has never questioned belonging to the eurozone.
Silvio Berlusconi, the former prime minister and center-right politician who still wields major political influence, has delivered a mixed message.
But his off-again-on-again partner in the center-right bloc, Matteo Salvini, has campaigned for years against a single currency and is known to wear shirts printed with “Basta Euro” — “Enough with the Euro.” His party, the League, has called for a vast overhaul of the treaties that regulate eurozone membership.
For years, the Five Star Movement promulgated euro-skepticism, and initially promised a nonbinding referendum on the euro. That stance softened when it became clear that many investors feared a euro exit. On Monday, the party’s leader, Luigi Di Maio, said his party had never supported leaving the euro. Still, the party wants Italy to have more sovereignty in economic choices.
How could Italians leave the euro?
Experts are debating how that would be possible. Italy would have to change some articles of its Constitution, which is deeply intertwined with European principles, and draft a constitutional law. A referendum could be called.
Even if Italians voted to exit the euro, the procedure could be lengthy and messy. Experts say that Italy would need to stop economic and banking activities for months to avoid speculation. Financial analysts say it is probable that many investors would avoid Italy.
If a referendum may not even happen, why worry now?
Just the possibility of an Italian government skeptical of the euro has created financial market volatility that could indirectly lead to problems in Italy, one of Europe’s most indebted countries. If volatility continues, Italy may have difficulty selling government bonds that are used to pay its debts and finance salaries and pensions. The only solution would be a rescue from European Union financial authorities, with the acceptance of the same kind of austerity requirements imposed on Greece.
What would happen to Italy if it left the euro?
Many experts agree that Italy would be poorer, with uncertain economic prospects for years. Italy would likely default on its debts, and its replacement currency would be greatly devalued. A default could lead to retaliation from other countries, asset freezes abroad and economic isolation. Italy sells more than half its goods within the European Union.
What would happen to Europe?
Financial markets and speculators might see the euro as an untrustworthy currency, throwing into doubt the premise of stability and strength its founders envisioned. The effects could corrode confidence in the European Union itself.
“The contagion would be enormous,” said Massimo Bordignon, professor of economics at Milan’s Catholic University. “And the cost for Italy and for the other European countries would also be enormous.”
Rick Gladstone contributed reporting from New York.