Euro Gets Italian Boot

Europe’s fightback against populism was going well for a couple of hours. On Sunday afternoon, it emerged that the far-right candidate had lost the Austrian presidential election. But the good news from Austria was drowned out by bad news that same evening, from the other side of the Alps. Matteo Renzi, the Italian prime minister, had lost his referendum on constitutional reform and confirmed that he will resign.

The consequences for Europe of Italy’s referendum result are not as obviously dramatic as those of Britain’s referendum in June. The British voted to leave the EU. The Italians have simply rejected some complex constitutional changes, which many experts regarded as ill conceived in the first place.

And yet Brexit and the Renzi resignation do form part of the same story. The European project is under unprecedented strain. Britain’s decision to leave is the most striking evidence of this. But, in the long run, the unfolding crisis in Italy could pose a more severe threat to the survival of the EU. The reasons for this are political, economic and even geographic.

Italy, unlike Britain, is one of the six founding members of the EU. The original European Economic Community was founded through the Treaty of Rome, signed in 1957. While the British were always the most Eurosceptic of the big EU nations, the Italians were traditionally the most enthusiastic unifiers.

But attitudes to the EU in Italy have changed profoundly — in response to the country’s long economic stagnation, the euro crisis and fears over illegal migration. It is hardly surprising that Italian voters are disillusioned with the status quo. Italy has lost at least 25 per cent of its industrial production since the financial crisis of 2008. Youth unemployment stands at almost 40 per cent. Unsurprisingly, many Italians associate the advent of the euro with a near-depression. And indeed some economists believe the euro has been disastrous for Italy’s competitiveness, taking away the tools of currency devaluation and creating a deflationary environment that increases the debt burden.

Against this grim backdrop, it is possible that Mr Renzi will be one of the last Italian prime ministers to represent his country’s traditional pro-European stance. Of late, even he had taken to Brussels-bashing — expressing understandable disillusionment with a lack of help with the hundreds of thousands of refugees landing on Italian shores. The Renzi government has also chafed against the economic austerity prescribed in Berlin and Brussels.

Nonetheless, Mr Renzi remained basically pro-European. That is not true of the opposition parties that are now waiting in the wings. The Five Star Movement, led by comedian Beppe Grillo, played a prominent role in defeating Mr Renzi. Five Star is adamant in its demand that Italy regain sovereignty from Brussels and has proposed a referendum on leaving the euro. Mr Grillo also sees his movement as part of a general anti-establishment wave across the west and hailed the victory of Donald Trump in the US as a triumph over “the Freemasons, huge banking groups and the Chinese”.

The reasons that Italian populism may ultimately threaten the EU even more profoundly than Brexit are not simply to do with Italy’s traditional commitment to the European ideal. Also crucial is the fact that Italy uses the euro while Britain has kept its own currency. So, while Brexit is a painful and complicated business, it does not directly threaten the survival of the single currency — or risk unleashing a financial crisis. However, the chain of events set off by Mr Renzi’s referendum defeat could potentially do both.

The immediate danger is to the Italian banking system. In the new atmosphere of crisis, the proposed recapitalisation of troubled lenders — in particular Monte dei Paschi di Siena — is threatened. That could lead to demands for state bailouts, which will be difficult given that the state is already heavily indebted. Revived worries about the size of Italy’s debt could then frighten investors, driving up interest rates and threatening the solvency of the Italian state itself.

It would be much harder to organise an EU bailout of Italy than it was to “rescue” Greece. Given the size of the economy, the amounts of money involved could be far larger — which would probably trigger a political revolt in the German parliament, particularly with parliamentary elections due there next September. At that point, the break-up of the euro would once again become a very real prospect.

Set against this is the Italian talent for muddling through politically and economically while always avoiding ultimate collapse. The EU seems to have developed something of the same talent over the long years of the euro crisis.

Yet, even if the Italians manage to patch together a new government and avoid a banking crisis, the broader picture is still bleak. Italy’s economy is stagnating and its political centre is disintegrating. Nationalists and populists are also on the rise in EU countries including Spain, Poland, France and the Netherlands.

Britain has promised to submit its formal notification of its decision to leave the EU next March. That same month, the union’s leaders are meant to gather in Italy to celebrate the 60th anniversary of the signature of the Treaty of Rome. At this rate, it will be more of a wake than a party.

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