By Roberto Orsi
The European Union is approaching a moment of difficult decisions which will determine whether it will manage to survive in the near future or whether it will enter the final trajectory of its dissolution. In the past few years a series of crises have shaken the very foundations of the European integration project, often with damage which clearly appears irreversible, particularly the ongoing migration crisis, Brexit, and the festering Eurozone crisis. Now a new chapter of the crisis in the common currency is rapidly becoming apparent. On the one hand, Greece is again dealing with financial trouble which would require another round of international intervention; talks of Grexit have re-gained momentum. On the other hand, and adding to that, the worsening of Italy’s financial outlook is bringing about this time unavoidable and fundamental questions about the entire euro-project and its future.
With Renzi’s defeat in the referendum concerning constitutional reforms (November 4th, 2016) and the collapse of his government, political uncertainty has returned to Rome. However, this time it is not the stereotypical situation of Italian politics. A few things have become rather clear to all those who want to see them:
- Italy’s economy is not going to grow much faster than 1% per year in the foreseeable future in the best possible scenario. This comes after roughly twenty years of stagnation-depression. If Italy can only record a 0.9% growth in 2016, a year when numerous external circumstances were massively in its favour (a weak euro, ultra-low interest rates, quantitative easing from the ECB, low oil prices, growing trade partners), what will happen when this exceptional alignment of propitious planets dissolves?
- Italy’s chances of economic growth are hampered by a severely negative demography, a well-known problem which cannot be solved by additional immigration, particularly considering that many migrants have started to leave for more dynamic economies or more generous welfare systems, and hundreds of thousands of young Italians, often with high qualifications and skills, are leaving the country for good. Demography alone condemns the country to a near-zero or negative GDP growth, with all the financial implications.
- A series of financial cracks have started to appear: not only the well-known story of MPS bank, but the banking sector in general is under pressure, with numerous institutions facing serious trouble. Unicredit, the largest bank in Italy, has closed 2016 with a loss of €8 billion, and it is now trying to raise an unprecedented €13 billion in new capital. Furthermore, it emerged recently that INPS, the largest state-owned pension fund and one of the largest in Europe, runs a deficit of over €12 billion/year and during 2016 has crossed the boundary into negative equity. Directly or indirectly, all these are deficits which will have their impact on the state budget, as candidly admitted by the INPS president.
- Italy has a debt/GDP ratio of well over 130%. With an economy which cannot grow in real terms, it can only reduce its debt burden by means of inflation. However, on the one hand the ECB has to keep inflation within limits in the interest of the Eurozone at large, and on the other higher inflation would push interests in the Italian debt higher, with a heavier interest burden which Italy cannot afford (if not financially, then certainly in political terms). After 2011-2012, when it became clear that markets were pushing Italy towards insolvency, the ECB has engineered a protection net to prop-up the national debt, thereby gaining time. However, this came as a consequence of a political agreement within the EU, according to which Italy received (indirect, but massive) financial aid in exchange for deep reforms of its economic system: from labour market laws to pensions, from spending cuts to governance changes. The German/EU idea was that Italy could be put back on the tracks of economic-financial sustainability through those reforms, which were even listed in all detail in a famous letter from the ECB in summer 2011.
- After more than five years and three governments (Monti, Letta, Renzi) in which the technocrats of the economic ministries and the Bank of Italy have played an important role, it is clear that Italy is fundamentally unable to reform itself and therefore it will not regain the aforementioned economic and financial sustainability. In all frankness, the German/EU plan was hyper-optimistic at best, bordering on delusion.
- As these elements become all too apparent, the political debate in Italy is becoming more disillusioned than ever about the immediate future of the country. What was once the twisted idea of some pessimist commentators, including the author of this piece, it is now becoming widely accepted: Italy will face a major financial shock, and state insolvency is now practically impossible to avoid within the current formulation of the euro-system. Hence the rise of a growing number of those who argue for exiting the Eurozone altogether, as well as a strong anti-EU and anti-German rhetoric.