Panic shook markets on Tuesday when a political fight in Italy led to one of the worst market selloffs in years. The investor's anxiety among investors was the prospect of Italy losing the euro and others following what Blanchard, now a professor of economics at the Massachusetts Institute of Technology, describes as a psychological fear rather than a realistic threat
Italian creditors, who should "move cautiously," said the economist to Joumanna Bercetche of CNBC in Paris. The rest of Europe could avoid a domino effect, but Italy seems to be stuck in a swamp.
"I suspect that in this case the EU will do anything to prevent infection, so I'm not particularly worried about contagion," said Blanchard. "I'm very worried about Italy. I'm not worried about the rest of Europe. It's going to be tough, but the rest of Europe, the rest of the Euro will be fine. "