Volatility returned to Europe in recent days, as the Italian President rejected a proposal by two populist parties to form a coalition of government. In the March Italian elections, no party received enough votes to rule independently, necessitating an alliance between the Five Star left wing and the League right wing parties. Both parties have been critical of the euro and Italy’s membership of the European Union.

The next likely step is new elections in the fall. Markets are concerned that either of these populist parties could end up with even more votes in the new elections and would be more likely to push for distance between Italy and the rest of the European Union.

However, while there is sure to be plenty of campaign rhetoric criticizing Europe and the euro, the more likely outcome (if these populist parties end up in control) is for Italy to try and negotiate more freedom within the existing European Union and euro structure. Indeed, the majority of Italians support the euro, with only 30% against the euro (a smaller percentage than in Europe at large – see chart). So while this is a negative for European stability, it is premature to assume significant changes in Italy.