Italy is just three plausible steps away from crashing out of the Eurozone
“Never ask a question if you don’t know the answer” – Common courtroom adage
"Plausible threat” is a term of art in political risk analysis, meaning the peril being discussed can come about through entirely possible events. Martians disrupting France’s upcoming presidential election would not be a plausible threat (fun though it would be). On the other hand, Italy – through three entirely plausible steps – could soon leave the euro, destroying what little credibility the currency has left.
Step one involves reformist Prime Minister Matteo Renzi losing the autumn referendum he has called on ratifying far-reaching Italian political reform. The Renzi government has become increasingly convinced that it is endemic political sclerosis that is most holding back this beautiful but moribund country. As such, the Prime Minister has proposed a series of changes that ought to make for far stronger (and long-lasting) Italian governments. He rashly decided to put these political reforms directly before the Italian people, saying he would resign if they were rejected.
The problem is as ever that people are very likely to base their vote in the referendum on many other factors besides the merits of political reform. Most particularly, Italians are likely to vent their spleens at the terrible state of their economy – and worse still, from an establishment point of view – on the EU’s role as villain of the piece.
For there is no doubt that Italy is on its economic knees. GDP growth last year was a pathetic 0.8 per cent, with the Bank of Italy only estimating GDP increasing by an anaemic 1.1 per cent this year. In fact, in the second quarter of 2016, growth flat-lined at zero per cent. Staggeringly, the IMF estimates it will take until far away 2025 for the Italian economy to finally go back to its pre-Lehman crisis size. This is a country in depression.
Worst of all, the immediate peril concerns Italy’s wobbling banks, and the EU’s role in blocking Renzi’s necessary plans for their rescue. Italian bank bad debt totals a gargantuan €360bn, fully 18 per cent of all bank loans, double the rate of 2011. According to new EU rules, the banks cannot be bailed out by Rome unless bondholders take losses first.
Here is where yet again the EU’s general one-size-fits-all policy strategy simply makes no sense in a continent as diverse as Europe. Unlike in most other European countries, Italians have for centuries stored their wealth in local banks. They, and not foreign capital, would directly take the financial hit.
At present it is estimated that some 46 per cent of the losses for Italian bank shareholders and junior creditors – losses that must amount by EU rules to at least 8 per cent of any bank’s liabilities – are held by local Italian families. This is more than a large enough segment of the populace to sink Renzi’s referendum, politically tarring both him and an unfeeling, unaccountable (sound familiar?) EU in the process. In calling his referendum, Renzi has fatally asked a question for which he simply doesn’t know the answer.
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Step two follows on from Renzi’s referendum defeat and resignation; a new general election is called. With the Italian right still imploding as a result of the wasted Berlusconi years, the contest would come down to a straight fight between Renzi’s centre-left Democratic Party (PD), and the populist, advancing Five Star movement of comedian Beppe Grillo.
Five Star electorally broke through in June 2016 in Italy’s municipal elections, winning Rome – the jewel in the crown – as well as a number of important northern cities such as Turin. Running neck-and-neck with the PD in national polls, it is entirely possible that in the chaos following the collapse of the Renzi government, Five Star pulls ahead, and early next year forms a new Italian administration.
Step three follows logically on from this. While the party is less enthused, Grillo himself has long been an ardent Eurosceptic, pledging to call (yet another) referendum on Italy staying in the single currency. Were Five Star’s founder to put his foot down, such a vote would be highly likely to take place. Recent mid-May polling put Italian support for leaving the EU itself at 48 per cent; so support for leaving the single currency would be substantial. If the EU continues to stand in the way of an Italian bank bail out, such a vote would surely be too close to call.
Plausible threat analysis allows political risk analysts to tell a story, testing their hypotheses with real world data to see how likely individual risks are. Using this creative and innovative technique, it is clear that Brussels – always so maddeningly self-satisfied and analytically behind the curve of every crisis – had better be very, very worried about what is going on in Rome. For the euro is three plausible moves away from unravelling.