Yes, Europe may well be facing another crisis: Olivier Blanchard, Silvia Merler, and Jeromin Zettelmeyer: How Worried Should We Be about an Italian Debt Crisis?: "Two conditions... that rising interest rates reflected economic recovery; and... that the Italian government would be prepared to cooperate with European authorities... no longer hold...
...Political backlash to slow growth and immigration has produced the least cooperative government imaginable, a coalition between the left-populist Five Star Movement (M5S) and the right-populist Lega. And borrowing costs have started to rise in reaction. Does this mean that a crisis is imminent? If so, how bad would it be? The second question is easier to answer.... A crisis could be horrific.... None of the powerful stabilization instruments that the euro area has developed over the years could be deployed to rescue Italy.... With the ECB using all available tools to limit contagion, the euro might survive Italexit. But an exit would nonetheless put Italy, the euro area economy, and the European Union in deep distress. With credit, investment, and consumer confidence collapsing, Italy would enter a deep recession. Redenominating assets and liabilities of Italian corporates and banking would trigger bankruptcies and legal conflict....
How likely is such a scenario?... To succeed in the next election, the two parties will want to deliver on their major promises. Are the promises featured in the M5S-League contract compatible with a scenario in which Italy (and Europe) do not end up facing a debt crisis?... M5S promised the introduction of a minimum guaranteed income.... The League party promised a flat tax.... Both parties advocated the repeal of a controversial pension reform.... The total would reach a whopping... 6 to 7 percent of GDP.... Difficult to imagine a course of policy that would not put it on collision course with financial markets and the European Union....
But... the government may eventually blink. A full-fledged crisis would hurt Italy at least as much as the rest of Europe.... Most of the policies that could bring Italy to the brink of crisis will be manifested in the revision of the 2018 or 2019 budget... [which] need[s] to be approved by both chambers.... The governing coalition’s majority in the upper one—the Senate—is slim: 6 votes.... Third, Article 81 of the Italian constitution introduces a balanced budget principle, and Article 97 states that general government entities, in accordance with EU law, shall ensure balanced budgets and the sustainability of public debt. A budget that too bluntly contravenes these rules could be deemed unconstitutional by the president of the Republic, who could refuse to sign it.... One can imagine several scenarios in which escalating crisis conditions—rising borrowing costs, accelerating outflows—eventually induce a correction.... Italy’s membership in the euro area may live to see another day. A European catastrophe may be avoided. But the costs of doing so could still be high, both for the political and social cohesion in Italy and for the future of Europe...
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