Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Italy is Europe’s leaden-toed boot

Posted by hkarner - 25. März 2017

Date: 23-03-2017
Source: The Economist: Charlemagne

The host of the EU’s 60th anniversary party is the country most likely to bring it down

THE European Union may be a Franco-German construction, but when the project needs a dose of grandiosity it invariably turns to Italy. This weekend the leaders of 27 EU countries (all bar Britain) will convene in Rome’s glorious Palazzo dei Conservatori, beneath 17th-century frescoes and flanked by sculptures of sundry popes, to proclaim their unity—60 years after their forefathers signed the Treaty of Rome, the EU’s founding document, in the same room. In today’s fractious union the symbolism counts for something, even if the declaration the leaders will issue is crushingly bland. Yet there will be a note of irony to the proceedings, for if you ask officials in Brussels or Berlin which country keeps them up at night, the answer is always the same: Italy.

Very little changes here, sighs a local who emigrated as a child and recently returned to Rome. Sadly, that includes the size of the economy. The European Commission forecasts Italian growth at 0.9% this year, the slowest in the euro zone. Since 2008 Italy has been in recession as often as not. Real income per head is lower than when Italy joined the euro in 1999, and could soon be overtaken by zippy Spain. Youth unemployment stands at 38%, and the employment rate is among the lowest in the OECD. No wonder barely half the population of this traditionally pro-European country think the euro was a good idea.
Does this matter? Italy is nothing if not resilient. It has remained standing through waves of terrorism, epic political scandals and the long Silvio Berlusconi years. Predictions that markets would swoon after a failed constitutional referendum in December proved off the mark. Instead Matteo Renzi, the prime minister, resigned (though he is plotting his return) and Paolo Gentiloni, the mild-mannered foreign minister, glided into place at the head of a largely unchanged cabinet. “We have a stable government with a stable majority,” says Mr Gentiloni. “That is not common on our continent.” Italy’s European partners speak warmly of the new prime minister, its 43rd since the war.

But peer ahead and it is not hard to conjure up a plot worthy of the most lurid giallo-writer. Italy’s chronically low growth, low inflation and gigantic public debt burden (133% of GDP) make a potentially deadly trio. A showdown with the European Commission over the autumn budget looms. The banks, stuffed with bad loans, look a little healthier than six months ago, but still pose a headache. Most worryingly, the European Central Bank will soon reduce its massive bond-buying programme and could phase it out entirely by the end of the year. That could mean Italian borrowing costs start to rise just as the country gears up for elections early in 2018. (It was rising bond yields, not irate voters, that forced out Mr Berlusconi in 2011.)

Enter the anti-establishment Five Star Movement (M5S). Its leader, Beppe Grillo, a bewhiskered comedian, thinks the euro has choked Italy’s exporters by blocking devaluation (although Italy’s northern manufacturers have fared well lately) and pledges a referendum on membership. This resonates with Italians’ growing Euro-fatigue; a new poll puts the M5S five points ahead of Mr Gentiloni’s Democratic Party (PD). Mr Grillo has previously ruled out working with other parties, such as the populist Northern League, which also wants out of the euro. But plenty of observers think the M5S would happily ditch that principle if necessary.

It is this brew of political and financial risk that has outsiders sweating. Italy, they say, is too big either to bail—its economy is 7.5 times the size of Greece’s—or to fail. As the election hoves into view, the prospect of an M5S-led government could spook investors, and perhaps even put at risk other wobbly euro-zone economies, starting with Portugal. Sandro Gozi, the Europe minister, says an anti-euro government in Italy would mean the end of the single currency. That is why it is common to hear euro-zone officials say it should never have been allowed in to start with.

Others reckon Italy will weather this storm, as it has survived so many before. Voters’ grumbles about this or that policy, says Mr Gentiloni, should not be mistaken for full-blown Euroscepticism. And should exit from the euro ever become a serious prospect, the thought of a collapse in euro-denominated asset values would concentrate minds. Some disillusioned PD sympathisers mutter that the M5S amateurs may as well be given a chance to prove their incompetence. (Virginia Raggi, the young M5S mayor of Rome, has made a pig’s ear of the job she won last June.)

Garibaldi was no economist
Italy’s problem, as described by an official in Brussels, was not the euro but the lira. It yoked together a productive north with the sleepy Mezzogiorno. When Italy joined the euro, optimists assumed that being locked into a currency with Germany would discipline it. But the productivity whip failed to crack; wages and prices remained too high relative to Germany’s, and in the 2000s Italy was woefully unprepared for the rise of competition from China. Successive governments failed to tackle structural problems, from a sluggish legal system to sky-high hiring costs.

Credit-rating agencies are frowning upon Italy, as the rest of the euro zone starts to pick up speed. But the biggest vote of no confidence comes from Italy’s own young people, tens of thousands of whom leave each year for opportunities abroad. Underinvestment in education and R&D make it hard to see where the long-term productivity boost Italy so desperately needs will come from. Money continues to be showered on the priorities of yesterday. And the demographic prospects are dire.

Mr Gentiloni does not downplay Italy’s problems. Beyond banks and migration, one of his priorities is an investment plan for Italy’s struggling south. It brings to mind a protocol in the Treaty of Rome, covering “particular problems relating to Italy”. In 1957 the EU’s founding members agreed to contribute European funds to the Italian government’s plans for job creation in the Mezzogiorno. After all, nothing changes in Italy.

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