Italy’s move on euro puts EU in a spot

Through more than two months of tough negotiations to form a government in Italy after inconclusive March elections, global financial markets remained relatively calm. Italy’s uncertainties seemed contained to Italy, and Europe’s economy kept growing.

That changed this week when Italy’s president, Sergio Mattarella, effectively blocked two populist parties from forming a government. He judged that a crucial member of their proposed cabinet was intent on having Italy abandon the euro, though they had not explicitly campaigned on that issue.

In doing so, Mattarella may have laid the groundwork for a new election, one that amounts to a referendum on the euro. The European Union and financial markets reacted with dread. On Tuesday, the Dow plunged almost 400 points, the value of the euro plummeted and the cost of borrowing for Italy shot up.

For the European Union, another Italian election would be terrifically bad timing.

Chancellor Angela Merkel of Germany, a linchpin of the bloc, is weakened; she needed six months to form a government after a rough election of her own last year that was marked by a far-right, populist surge. Spain’s government could face a noconfidence vote as early as this week and possible new elections as well.

However unlikely an Italian withdrawal from the eurozone may be, the mere prospect is more dangerous to the future of the European Union than the bailout of Greece, whose economy is dwarfed by Italy’s; Britain's vote to leave the bloc; or the squabbles over the rule of law with Hungary and Poland.

Italy is a founding member of both the European Union and the euro and the bloc’s fourth-largest economy, and psychology counts. After all, it was Brussels that warned Greece in 2011 that a proposed referendum on its bailout and the euro would actually be a referendum on membership in the European Union itself.