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Italy is pushing Europe to the brink of another economic crisis – but its problems are nothing new

The Independent logo The Independent 06/10/2018 Sean O'Grady
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Editor’s note: The opinions in this article are the author’s, as published by our content partner, and do not represent the views of MSN or Microsoft.

Strange to say, given our national obsession with Brexit, Britain is not the European Union’s only problem – or even its biggest.

Italy fits that description and, in fact, it has done for some time. The reason? Italy represents a mortal threat to Europe’s financial stability, and the very future of the European single currency. Or, more acutely, Italy’s government led by Prime Minister Giuseppe Conte, and his deputy and interior minister, Matteo Salvini, wants some radical change in the way the EU is run, especially the euro and migration policy.

Related: Millions of undocumented migrants: The riddle of Europe's shadow population

Brexit will come, and Europe will sail on regardless. It views the breakup of the single currency as a much more serious threat, and rightly so.

The “crisis” in Italy, however, is nothing new. It has been going on, with varying degrees of intensity, since 2010. Overshadowed by the more serious problems in Greece, Italy was always the real worry. While Greece was small enough for Germany and the richer members of the eurozone to rescue, Italy – with an economy not far off the size of the UK’s – is just too big: too big to fail, and too big to save. Hence the panic.

Related: Is Italy the next Greece?

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We know that this is an existential problem for the future of the European Union because Italy’s own populist leaders make no secret that they are unhappy with the way the euro works. If their European partners won’t allow Italy to spend and borrow more than the eurozone rules permit, they would rather have their own currency. They have even toyed with the idea of printing their own euro mini-bonds, functionally identical to euro banknotes but outside the control of the European central bank (and, in reality, illegal).

Watch: Juncker's austerity regime is Europe's real enemy, Italy's Salvini says (Bloomberg)

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In Italian elections, Brussels is blamed for many problems: the migrant crisis, the state of the economy, and the general sense of malaise about Italy’s stagnant, ageing society. The Genoa bridge tragedy stands as a symbol of national failure.

The nation is as divided as ever – rich and poor, north and south, populists and neo-fascists versus the moderates. Imagine a nation governed by an administration with Ukip’s attitude to migration but Jeremy Corbyn’s economic policies and you have the measure of Italy today.

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In the most recent standoff, over the Italian budget, the Five Star-League coalition in Rome backed down in their confrontation with the EU Commission, but hostilities will surely be resumed in due course – on Italy’s economic freedom and, even more important to the country, the migration crisis, an issue Salvini has adopted as his personal mission to solve.

Why is Italy in trouble? The simple reason is that its debts are too large, and investors fear that, sooner or later, the government will default on them. They could postpone or reduce the interest paid on Italian government bonds, or fail to pay up as they fall due, or, in extremis, leave the euro and introduce a new Italian currency. This would, ironically, make the euro-denominated debt even harder to pay off using, say, a new devalued lira. If investors or the European Central Bank (ECB) won’t lend to Italy’s government to keep its public services running, the political consequences would be incalculable.

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When Italy’s public finances are in trouble, so are those of its banks; by long tradition, they have always been more or less enthusiastic buyers of Italian government bonds, even when nobody else wanted them.

In recent years the ECB has been willing to buy them, but that programme is being wound down – another cause of friction between Italy and the EU’s institutions. If the banks’ assets – Italian government bonds – become worthless, then the banks themselves become worthless. If the Italian banks get into trouble then the Italian government has to try and bail them out, and a vicious circle ensues. Rescuing the entire system is beyond the means of the EU (ie Germany).

The more fundamental reason lies in Italy’s slow-growing economy. Behind that is a problem with international competitiveness and behind everything lies Italy’s dreadful demographics, with too few younger workers supporting too many older citizens. Ironically, migration would help solve some of that imbalance, but it is hugely unpopular – and with increasing resentment over the reluctance of other EU partners to accept migrants. Viktor Orban’s Hungary, in particular, has earned the wrath of Italian politicians, and there is no love lost with France, which lectures Italy about its responsibilities but fails to take much action.

Unlike the UK, Italy is not going to leave the EU – but it might be better if it did. Increasingly awkward and unhappy in the club, Italy’s populists seem more inclined to ally themselves with Trump’s America and Putin’s Russia than the EU of Macron and Merkel. Italy is like a troublesome old relative in the corner, chucking abuse at the rest of the family and unwilling to face up to their own shortcomings. There will be more rows.

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