The eurozone, also called the euro area, is a union of 20 European Union member states that have officially adopted the euro as their primary currency and sole legal tender. These member states exist under one monetary authority, the Eurosystem.
At the beginning of 2018, Italy was the third-largest economy in the currency bloc. When Italy entered into a deep political and economic crisis, it was a concern for the European Union (EU) and the global markets. At the time, Italy accounted for 11% of the EU’s gross domestic product (GDP).
At the end of September 2018, the ruling coalition comprising the Five Star Movement (M5S)—a political party that espoused a populist, anti-establishment view (and was critical of the EU)—and the Lega Nord—also a political party in Italy—submitted their 2019 budget to the European Commission.
The proposed spending plan called for a deficit equal to 2.4% of the gross domestic product (GDP). At the same time, Italy’s total government debt was equal to 134% of the GDP (more than double the eurozone limit); the eurozone contingent had been pressuring Italy to decrease its debt. As a result, this move upset Italy’s eurozone partners.Failure to Form a Stable Government
Political chaos and the failure to form a stable coalition government were at the root of the problems in Italy. Despite several weeks of prolonged discussions and negotiations, an agreement failed to materialize between the EU-skeptic populist group, M5S, and the pro-EU establishment lawmakers. This left the country in a deep political and economic crisis.
After the March 2018 vote produced a hung parliament, Italy was without a proper government. At this time, the populist M5S party emerged as the largest contender; they attempted to join the far-right Lega Nord party to form a coalition government. While the two groups agreed on Giuseppe Conte, a law professor, to be their prime ministerial candidate, his surprise resignation shortly thereafter caused a stir.
This development was attributed to President Sergio Mattarella’s refusal to accept a euro-skeptic candidate, Paolo Savona, as economy minister. Savona had been an opponent of the single currency in the past, calling it a “German Cage.” He has also advocated for a “Plan B” alternative to EU membership.
Under the law, the Italian president has the authority to block individual cabinet appointments. As M5S and Lega Nord refused to offer a different choice for finance minister, the coalition went for a toss. Instead, President Mattarella appointed former International Monetary Fund (IMF) official Carlo Cottarelli as interim prime minister; this paved the way for another round of elections.
Cottarelli thus became responsible for planning the new elections, as well as for introducing the new budget. (Cottarelli has a reputation for significantly cutting down on public spending, which has earned him the title “Mr. Scissors.”)
Unfortunately, this decision by the president did not bode well with the M5S and Lega Nord parties. Mattarella, who was instituted by the earlier pro-EU government, faced calls for impeachment from the leaders of M5S, as a result of Mattarella’s refusal to accept Savona as economy minister, appointing Cottarelli as interim prime minister, and mandating fresh elections.
At the time, Lega Nord’s leaders did not support the impeachment that the leaders of M5S were calling for. When these political developments hit the Italian economy, it caused further turmoil.
Weak Fundamentals in the Italian Economy
Many of Italy’s economic problems were longstanding, including a high number of problem loans on its central banks’ balance sheets, combined with decades of slow growth.
The country ranks among the countries with the highest government debt to GDP. Its total debt level was $2.5 trillion in 2019 ($3.2 trillion in 2025), and the country has been facing high unemployment since before the 2007-2009 financial crisis made things worse. The unemployment rate has significantly decreased since 2014, however, when it was 12.77%, and as of 2024, it is 7%.
In fact, after the 2008 financial crisis, Italy never made any significant strides towards a recovery. Greece and Italy were the two of the advanced economies carrying the highest debt burden at the beginning of the crisis; in subsequent years, only Greece suffered a more severe and more protracted economic depression.