Anti-establishment Five Star Movement leader Luigi Di Maio (left) and leader of the far-right party Lega, Matteo Salvini. Photos: AFP, iStock

Perceived risk of the eurozone cracking at the seams receded by the end of 2017 and there was a wave of cautious optimism. In France, a rebranded heir to the establishment in Emmanuel Macron took the reins after defeating his euroskeptic opponent, instilling investor confidence.

This year, fears resurfaced when a populist coalition in Italy shocked markets by forming a right-wing-left-wing coalition sympathetic to leaving the bloc. After dissipating somewhat, concerns that Rome had the stomach to drop the euro in favor of the lira came alive again this week, reflected in a surge in government bond yields to four-year highs.

Francesco Garzelli shares those concerns, and wondered in an editorial on Wednesday why investors, unlike in the lead-up to French elections, are not worried about contagion.

“This time, though, the Italian tensions have had limited spillovers,” he wrote for Bloomberg. “Yields on 10-year Spanish government bonds, for example, are close to where they were in the first quarter at about 1.5%. Indeed, the pricing of different CDS [credit default swap] vintages in Spain and other European Monetary Union countries … suggests a euro breakup is not considered a significant threat outside Italy.”

But, Garzelli added, “it would be unwise to dismiss entirely what those CDSs tell us. Yes, there are technical factors that warn us against interpreting them too broadly, but that was also the case before the French election when they offered a reliable guide about risks to the euro zone’s unity.”

Italy, he says, “remains a systemic fault line in global markets.”