This week saw Silvio Berlusconi, Italy’s former four-time premier, going before a judge at the European Court of Human Rights. He was seeking to have a past conviction cleared so he can run for head of Italian government again. Yet whether he succeeds and is able to contest the highest office or not, Italian politics is more fragmented than ever before only months ahead of a critical national election. The issues facing Italy now are serious and even could threaten the future of the euro currency.

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The Return of Berlusconi Complicates Fractured Italian Politics

Most observers and analysts had written Berlusconi off when he was obliged to resign in 2011. Between the rising European sovereign debt crisis that was impacting Italy severely and scandals that surrounded his administration, it seemed like his fourth term as Italian Premier would be his last one. A 2013 conviction for tax fraud only seemed to cement this certainty.

Yet despite these problems, the wily Berlusconi avoided prison entirely and returned to head up his Forza Italia (the Go Italy party). He was banned from competing in elections for public office. The former premier then filed a case with the European Court of Human Rights in 2013 to appeal this decision. His basis was that the newly legislated ban had been retroactively applied in his case.

Today the judges of the European Court in Strasbourg, France will hear his appeal against the ban. His lawyers are urgently fighting so that he can run again in the next election most likely to be held in March of 2018. Whether or not he runs as premier though, he will be a force in his party, as the International Monetary Fund former Executive Director for Italy Montanino stated:

“If no party wins a parliamentary majority as expected, the most likely coalition will be centered on Berlusconi’s Forza Italia and the Democratic Party even though they are now rivals. Berlusconi may not be premier, but he could be king maker.”

Berlusconi’s hope is that he will see this ban on his candidacy reversed before the upcoming general election so that he can form a coalition of the center right. Clearly Berlusconi faces pitfalls to a comeback. His unlikely election would bring in a coalition that is determined to upset the status quo with the European Union. Besides this, many of Italy’s current problems were only aggravated during his prior times in office.

Latest Polls Show Anti-European Union 5 Star Movement Ahead

Yet the comeback of Berlusconi is not the worst or most likely outcome for Italy in its upcoming national elections. Whether he runs or not, a hung parliament is the likely result of this early 2018 vote. The current leaders in the polls are actually not the former premier, but the Five Star Movement which is both anti-EU and anti-establishment.

Five star currently surveys at 28 percent. Next behind them are the currently ruling Democratic Party of the center-left that polls at approximately 25 percent. Berlusconi’s Forza Italia and the anti-immigration Northern League both register around 14 percent in the polls.

Many analysts fear the election of the Five Star Movement would lead to a serious rupture with the European Union. The party has backed off of its passionate drive to withdraw the country from the euro. Yet they still want to renegotiate all of the main treaties that Italy has with the EU.

International Investors Growing Nervous About Italian Government Dysfunction

Investors have become nervous ahead of elections again because of Italy’s combination of problems. For decades now the country has struggled with governments that were inept, a general economic malaise and lack of growth, and bad bank debt that stubbornly refuses to get better. This has driven angry Italians into the arms of populist movements which have no experience in governing on a national scale.

These upcoming elections will address a variety of critical issues. One of them will be the hostile feelings towards the euro. Another centers on Italy’s scary and growing debt. A third centers on the numerous problems with the large Italian banking system that is too big to fail (for Italy and Europe). These banks continue to grapple with toxic debt built up over decades.

What has investors most fearful though is that none of the competing parties can muster the necessary support to win a stable majority in parliament. If a hung parliament results and a strong government can not emerge, then Italy’s prodigious problems will only continue to fester and worsen.

The Serious Nature of Italian Debt Problems

Italy’s debt has become very serious over the last decade. Today it stands in excess of a shocking 130 percent of the Italian GDP. This makes it the second biggest amount of debt within the euro zone. Only troubled Greece boasts more. Even the European Commission has weighed in on the rising level of Italian debt, calling it a “major source of vulnerability” for the nation.

In fact the EC monitors Italy’s promises to cut down on spending. One of the real concerns surrounding the possibility of the Five Star Movement’s election victory is that it would create grave fears over whether Italy’s debt could be sustained.

Italian Banking System Problems Are Not Going Away By Themselves

The Italian government managed to address some of the most problematic banks during the past several years. They have backstopped Monte Paschi di Sienna and wound down two important regional banks in the Venice area. This is not the end of the Italian banking problems though. This chart shows which sectors are contributing most to the bad debt balances:

Chart Courtesy of LSE

Among still festering banking issues below the surface are non-collectible loans, excessive foundations, and political favoritism between banks and politicians. The ones who have taken the immediate losses include savers. Their angst is impacting the election significantly as Italians lose trust in their banks.

The Euro Is Still Threatened by the Italian Election

Two of the major parties are still against the euro. This includes the Northern League and the Five Star Movement. The candidate to become premier from Five Star,  Luigi Di Maio, now calls an Italian referendum on continuing with the euro the “last resort” to effect changes on the EU. Yet they are still talking about it as a possible tool and policy. The parties blames the longest recession in Italy’s history on the inflexibility the euro creates.

Naturally investors and markets are nervous that a hung parliament may emerge in Italy. Yet they also worry that the Five Star Movement lacks national governing experience. This could be reflected in any potential move to depart from the euro zone. The party’s policies for governing would seek to end the European Stability Mechanism and bailout supervision as well.

Italy’s Problems Impact the European and World Economies

There are plenty of reasons to be nervous about Italy’s continuing national economic problems. Yet another one is that the European Central Bank will soon wind down its quantitative easing program that has helped Italy in particular. As the third largest economy in the euro zone with internationally important and connected banks, Italy’s problems impact not only the economy and markets of Europe, but also the world.

Italy’s problems are among the reasons why you need a gold IRA. Your investment and retirement portfolios do not have to be held hostage by the geopolitical concerns and instability coming from Italy. You can help to safeguard against a market pullback by including gold in it now. Gold offers insurance and protection during market turbulence. These are among the many reasons not to sell your gold.

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