The world is never far away from another financial crisis looming, it seems. Ten years ago it was the US that started the GFC, but Europe was still suffering a few years afterwards with Greece in-particular teetering on the edge of disaster.
Somehow the EU and ECB managed to work its way through that, however Italy was also seen as a weak point. Greece grabbed all the headlines, but Italy was a lot more important because it was (and is) the fourth largest European economy behind Germany, the UK and France.
That's why the markets are so worried by the latest goings on in Europe, specifically Italy. There is a growing scepticism of the EU in several European countries. The UK is already leaving with Brexit. Some Italian political parties also want to leave – they believe EU elites are a main cause for Italy's troubles.
Having one currency for all the different countries and economic situations does seem puzzling to some experts, it seems to benefit Germany whilst hurting the weaker economies like Italy.
The anti-EU Five Star and League parties stopped their efforts of trying to form a coalition with Italian President Sergio Mattarella, he vetoed their selection of a Eurosceptic economy minister.
There could be a vote of no-confidence and new elections will likely follow, which see the anti-establishment parties win more ground.
Does this matter?
The financial markets seem to think so. The Dow Jones went down 1.6%, the S&P500 dropped 1.2%, Italy's market went down 2.7% and European markets fell more than 1%.
Several European banks fell more than 5% and major American banks dropped more than 3%.
In reality, it doesn't matter until it does. Politicans, central bankers and world organisations have come together many times over the past decade to avert a crisis. They went to such effort to avoid a much bigger GFC meltdown, I don't think they will let this get too far. It could just blow over.
Of course it could turn into something bigger if the situation doesn't improve. Italy has a debt to GDP ratio of around 130%. Italy's short-term bond yield reached 2% (after being negative in May) and ten year bonds are around 3%. If these yields rise further for a sustained period Italy, and then Europe, could face lower growth.
Foolish takeaway
What's going on in Europe doesn't really affect a2 Milk Company Ltd (ASX: A2M) formula sales, Wesfarmers Ltd's (ASX: WES) Bunnings sales or demand for CSL Limited's (ASX: CSL) products. However, investors could sell on fear – so if your portfolio does go down I don't think there's anything to worry about long-term yet. It could be an opportunity!
