A fashionable term in recent years has been that of “decoupling,” understood as two realities diverging from their normal pattern of correlation and embarking on independent paths. Unsurprisingly, developments have shown that – in a highly interconnected global economy – there can be no lasting disconnect between the economies of different areas of the world.
A fortiori, much less can there sustainably be one between developments in the real economy and the financial markets. Yet in recent times that is exactly what we seem to be witnessing, in both world equity markets and eurozone bond yields. Sooner or later, economic and financial developments will need to realign. It would be far preferable for economic developments to align with the markets’ expectations, rather than the reverse. It is up to major countries’ economic policymakers to ensure that this inevitable recoupling unfolds along a virtuous path. The steps that Italy needs to take have been known for a long time. And time is now running out.