Bond and equity markets across Europe and Asia have sold off as market participants fear the consequence of another Italian general election, with the FTSE 100 falling 1.39 per cent this morning.
Last week Italy's president rejected Paolo Savona as finance minister of the nascent populist government on the basis he was an advocate of exiting the euro currency area, a policy not contained in the manifestos of the two populist parties - Five Star and the League - which nominated him.
Mr Savona's rejection led to the resignation of the designated prime minister, Guiseppe Conte, and the nomination of a technocrat, Carlo Cottarelli, by the Italian president as an interim before new elections are held.
But the market fear is that Mr Cottarelli will swiftly lose a vote of confidence and a fresh election will be called, leading to greater success for Italy's two populist parties.
Chris Beauchamp, senior market strategist at IG Group, said: "Italian political instability is very much front and centre of investor concern today, with stock markets across Europe in the red.
"Worries about the policies of a potential Five Star and League coalition have been replaced by fears the populist parties could make even further gains in new elections.
"With the populist parties making great strides off the back of disenfranchised and dissatisfied Italians who wants a change from the status quo, we are likely to see any future election drive further gains for the Five Star and League parties, thus heightening the chance of a more radical upheaval.
"It comes as no surprise that we are seeing Italian markets suffer heavily, with the FTSE MIB hitting a 10-month low, and the two-year bond yield topping 2 per cent for the first time since 2013."
He said these concerns have led to a shift into "safe haven" assets such as the Japanese Yen and gold.
Economist Wynne Godley, who is credited by many with having forecast the global financial crisis, was sceptical about the durability of the euro on the basis the single currency would be much stronger than the individual currencies of countries such as Italy, Greece and Spain had been.
Those countries have always had economic models based heavily on exports, so if the currency in which they are selling their exported goods has a higher value than the previous currency they used, then the volume of the goods sold by those countries would decline, harming the long-term economic growth prospects.
Mr Godley said governments in those countries would would deploy policies designed to keep wages and taxes lower, in order to make exports cheaper but those "austerity" economic policies have a negative impact on voters, who vote for non-mainstream parties in response.
Charles St-Arnaud, senior investment strategist at Lombard Odier Investment Managers, said "The nervous reaction of investors to political developments in Italy highlights concerns over the implications for Eurozone stability.
"We believe that now is the time for investors to assess their exposure to European assets, especially Italy and the rest of the periphery, increased friction in the EU seems likely."
David Scott, an adviser at the firm of Andrews Gwynne in Leeds, said he views events in Italy as more dangerous to the future of the EU than Brexit.
david.thorpe@ft.com
