Fresh memories of Brexit still lingers.
The future of the European Union without the United Kingdom is still contentious but Italy leaving the EU is unthinkable. Welcome to a possibility of Italexit.
RISING ITALIAN POLITICAL RISK, MAMMA MIA!
The Five Star Movement party in Italy was the last thing that investors wanted to see taking any control of power.
But, that is all history now.
The new government has shaped up with one of the oddest collations in its history. Mr Giuseppe Conte, just sworn in as the new prime minister of Italy, will have a difficult task on his hands. He has to run a government which consists of two populist parties - the far-left Five Star Movement and the far-right League - and this could strain Rome's relationship with Europe.
Will this uncertainty raise the question of Italy's membership in the EU once again?
This has put further upward pressure on Italian and peripheral spreads, which has turned from something that is Italy-specific to a more general risk to the Euro Area. Consequently, investors are requiring more risk premium to hold European equities.
Italy is the euro zone's weak link and this is a main long-term risk to the sustainability of the monetary union due to Italy's systemic importance.
ITALIAN OPERA TO FOLLOW GREEK TRAGEDY?
This coalition could disrupt the EU's aim because both collation partners are poles apart in terms of their views.
One component which both the left-populist Five Star Movement and right populist League hold in common is anti-immigration.
Italy could follow the path taken by Greece's Syriza a few years ago. At the time, Greece's Syriza party demanded less austerity using the threat to leave the EU as a bargaining chip. The economic outcome was disastrous for Greece. Hopefully, this Italian opera will not become a Greek tragedy.
ITALEXIT ON THE CARDS?
Italy's euro exit is not impossible but it is going to be very difficult to orchestrate. There are several big hurdles:
• the new coalition could lead to more fragmentation and lead to policy paralysis;
• Italy's constitution makes it impossible for a government to rescind international treaties by referendum unless the current coalition intends to drastically alter the current arrangement;
• pro-European factions within the government would oppose euro exit; and
• financial markets will punish Italy for an euro exit, making it difficult to proceed with an exit.
While the probability of a euro exit has inched higher, Italy's exit is still a black swan event - a very low probability but high impact situation.
IT'S THE POLITICS, STUPID!
From a macro perspective, not much has changed since the elections in March.
Italy's growth so far seems relatively unaffected by the political uncertainty that has been hanging over the country for a while now.
The Italian manufacturing data have declined in recent months, but the extent of the fall is very similar to the other euro zone countries.
While this suggests some growth moderation to the outlook, it does not point to a larger drag in Italy than elsewhere in Europe.
The Italian business and consumer confidence have come down slightly in recent months. However, both remain at elevated levels, thus not suggesting an imminent substantial weakening of activity. The risk is the festering of this political uncertainty, which can increase the downside risks to growth through the sentiment channel.
Faced with uncertainty, firms may hold back investment plans, which could show up in a worsening of business sentiment and weigh on investment spending. This is important because investment has been such a dominant driver of Italian growth recently. By contrast, household spending tends to be more resilient against such political uncertainty.
So far, this is a political problem not an economic issue.
REPEAT OF EUROPE DEBT CRISIS NOT LIKELY
The repeat of the euro debt crisis 2011-12 is not likely. This is because the European economy now is in a much better shape.
In all likelihood, European growth should not be stifled by the ongoing political uncertainty in Italy.
The risk of contagion to the rest of the euro zone is far less than it was in 2011. The other vulnerable countries like Spain, Ireland, Portugal and even Greece are now in much better position (with lower budget deficits, stronger growth and falling unemployment).
Furthermore, the European Central Bank has a playbook in place to deal with contagion risk.
INVESTORS WATCHING MAMMA MIA CLOSELY
For investors, Italy is much bigger than Greece, so Italy walking down Greece's path is dangerous.
Italy has a gargantuan amount of debt and little commitment to reduce that any time soon.
To make matters worse, the upcoming government has plans to raise debt even further.
The left side wants to implement high-spending policies while the right side wants to lower the tax burdens. We suspect the longer-term problems will be contained, but in the near term, sentiment could turn very uncertain.
• The writer is senior investment strategist at Bank of Singapore