If you’ve become confused following the seemingly endless stream of back-and-forth headlines from Europe, we don’t blame you.
The latest, still-contested elections in Italy mean financial conditions in Europe have become unstable once more, following some six months of improvement.
Italy’s massive public debt burden and lack of competitiveness have put the country in a tough position. Investors have been lending Italy and Italian companies money since European Central Bank (ECB) president Mario Draghi promised to “do whatever it takes” to keep the euro a stable currency, including supporting a troubled country like Italy in case market conditions deteriorated. That aid would, however, depend upon the Italian government and its willingness to make unpopular reforms that cripple its economy in the short-term. Because investors doubt that Italian politicians will be willing to bite the bullet, they’ve become dubious of the ECB aid, dubious of the Italian government, and altogether less optimistic about the future of Europe.
But if you’re reeling from de ja vu, never fear. Morgan Stanley’s European economics team points out that the European crisis has more or less been moving in cycles: crisis, response, improvement, and complacency. By that logic we’re now at the very beginning of the fourth such “CRIC” rotation. This is both good and bad: on one hand, Morgan Stanley analysts downplay the likelihood of a “severely negative event.” On the other hand, we’re likely to see a new round of negative headlines out of the region for awhile.