Italy illustrates the important, and disturbing, interlinkages in the global financial system. From Simon Black at sovereignman.com:
Trying to trace the origins of the latest political crisis in Italy is like… well… trying to trace the origins of the decline of the Roman Empire.
There simply is no good starting point.
You can’t talk about the decline of Rome without a lengthy discussion of how destructive Diocletian’s Edict on Wages and Prices was in the early 4th century.
But you’d have to go further back than that and discuss all the lunatic emperors preceding him, all the way back to Caligula.
But you can’t talk about Caligula without bringing up the effects of the civil war between Octavian and Marc Antony… which was a direct result of the previous civil war between Julius Caesar and Pompeius Magnus.
Before long you’ve gone back in time more than 500 years trying to figure out why the Roman Empire collapsed.
Modern Italy isn’t so different. After all, this is a country so unstable that it’s had 64 governments in the seven decades since the end of World War II, averaging a new government every 14 months.
That has to be some kind of world record.
And to accurately diagnose how Italy ended up in such dire financial and political turmoil, you’d have to go back a -very- long way.
But for the sake of brevity, we’ll just go back to March. Italy held elections, and the “5-Star Movement” political party won the most seats… but not a clear majority.
This required them to establish a coalition with other political parties, which took weeks of haggling and negotiating.
But finally the 5-Star Movement was able to hammer out a deal and present a formal plan to Italy’s head of state, President Sergio Mattarella.
The President of Italy is almost purely a ceremonial role, like the Queen of England. But he does have the authority to reject key government appointments, including Prime Minister and Finance Minister.
And that’s exactly what he did– specifically opposing the nominee for Finance Minister, an economist named Paolo Savona.
Savona is a huge critic of the euro, and President Mattarella thought him too dangerous for the post.
Again, while the origins are more complicated than that, this is the basic plotline behind the most recent crisis.
Late Thursday night the Italian government announced a compromise, supposedly bringing an end to the uncertainty.
But to me, none of that matters. What I find -really- important is what an enormous impact this soap opera had across the world. And I think there are three critical lessons to take away:
1) On the day that the finance minster was rejected, financial markets worldwide tanked.
To continue reading: Three critical lessons from Europe’s recent mini-meltdown