The right triumphed at the polls in #italy and everyone is wondering how the new government will tackle the country’s problems. They are missing the forest for the tree as the options available are slim regardless of the colour of the party in charge.

Italy’s two major problems are a feeble economy and a gigantic public debt, the third largest in the OECD after Japan & Greece. The two issues are related as the country has been unable to grow out of its debt. At a very basic level, the problem with the economy is that there are not enough people working and those who do are not productive enough. The first issue is especially striking as Italy has the distinction of having one of the oldest #demographics but also the lowest labor force participation in the OECD (see chart). In plain English, only about 41% of the total adult population has a job or is seeking one; the lowest among advanced economies and, likely, globally.

Saddled with a debt that is unable to repay, the only option left is devaluation. Either in #euro or Lira terms. The former will play out through protracted inflation over, say, five to ten years. The latter would play out more swiftly with the redenomination of the currency. The #ecb has been the only buyer of Italian debt since 2014 and it is unlikely that Italy would opt to leave the monetary union as long as the central bank keeps monetizing its fiscal deficit. Should that change, #Italexit would be the only option. Regardless of who the ruling party is.

Another scenario is however gaining ground; #deglobalization is forcing Germany to rethink its economic model starting with energy security. Such wholesale effort will require massive fiscal expansion. Given the need to keep inflation at bay and the inability of the ECB to tighten financial conditions, the country may decide that a return to monetary sovereignty is in its best interest. After all, history shows that monetary unions are typically undone by the stronger countries rather than the weakest. Again, an outcome that is decoupled from whomever is in charge in Italy.

As opined on these posts before (https://bit.ly/3LXYYkV), investors wishing to deploy capital in Italy or Europe may want to wait for the dust to settle before searching the rubble.

You can follow me on twitter @pietroventani for more timely comments and updates.

Disclosure: Hold all assets mentioned. Not investment advice. Do your own research.