Although the rest of the world may think so, Brexit and Greece are not the only problems which are troubling the European Union right now. While there is no denying the fact that the Union has seen many ups-and-downs in its 26-year history and has averted many crises, it now stands at a juncture where its future looks bleak, at best.
From getting the upper-hand in the Brexit negotiations to bailing out Greece, the European Union saw to it that it tackled both these headaches. On one hand, it has punished Britain for leaving the Union while on the other hand, it has somewhat saved the Euro and the Grecian economy from going haywire. At the moment, however, it is concerned about the third largest economy of the Union which is at the verge of failure even though it was branded as “too big to fail”. This economy, called Italy, is marred with high levels of unemployment and unsustainable levels of debt. If it fails, no matter what measures Paris and Berlin may take, the European Union would most probably break up.
But Italy’s condition was not always like that. The economy had been doing pretty good, growing at a respectable pace of 4% up until the global financial crisis of 2008. The Italians were taking full advantage of the available cheap credit and were borrowing freely and heavily from the market to finance their developmental and infrastructural projects. Before anyone could know, the total debt of Italy was already more than 100% of the GDP. Even though the situation was alarming, the banks and investors had confidence in Italy paying off its debt as its economy was prospering and taking full advantage of the boom. However, when the financial crisis of 2008 hit the Italians, it hit them hard.
The economy was pushed into a recession and since then, Italy has lost 6-7% of its GDP, the largest loss in the European Union after Greece. When it tried to recover, the 2011 debt crisis hit back, with the investors losing confidence in the Euro. What saved Italy from bankruptcy and the European Union from destruction was Mario Draghi, the Italian President of the European Central Bank. He famously stated, “I will do whatever it takes me to preserve the Euro. And believe me, it will be enough.”
His decision of printing money to buy up government bonds in the European Union, reluctantly supported by Germans, is what averted the crisis and pushed it back further. However, the debt crisis and the lost confidence of investors in the Euro led to the ousting of the then Prime Minister of Italy, Silvio Berlusconi in the year 2011. Since then, political instability has also added to the woes of the Italian economy as the country did not have an elected Prime Minister till the end of 2018. The present government is being headed by Giuseppe Conte and is a coalition of the extreme-left Five Star Movement and the extreme-right League. To add to that instability, the government is currently facing a dilemma between the European Union and its citizens.
The real GDP of Italy is still below what it was before the financial crisis of
- The per capita GDP is lower than what it was two decades ago. Industrial production is down by 25%, which has led to massive outbursts of unemployment. Currently, the official unemployment rate in Italy stands at 10%. However, youth unemployment is currently between 30-35%. In South Italy, the situation is absolutely catastrophic with devastating unemployment rates of 60-70%.
Frankly speaking, the Italian government does not have money to finance projects for employment generation. Italy’s sovereign debt stands at $2.1 trillion and it pays $80 billion as interest each year. Hence, the investors are losing confidence in Italian government bonds, which is reflected in Moody’s rating of Baa3, its lowest investment grade above junk status. This has made the cost of raising debt far too costly for the government of Italy as the difference between the rate of interest of Italian bonds and German bonds has already breached the 300-point mark, which is a sign of concern for Italy right now. This is why foreign investors are selling their Italian bonds like hot cakes in the market and getting the hell out of the country as they fear Italy to be the next Greece.
Another reason for the empty pockets of the government is shadow economy and tax evasion. 30% of the economy is unaccounted for, which leads to the government losing out on a huge amount of tax revenue. Moreover, low labour productivity coupled with minimum wages makes Italy unattractive as a manufacturing hub. To add to this, the population of Italy is ageing. Each woman on an average produces only 1.3 children which has led to the rapid ageing of the Italian population. This means a higher expenditure for the government on social security and lower productivity of the citizens.
In spite of its empty pockets, the left-right government of Italy has proposed ambitious plans for the restructuring and redevelopment of the economy and various employment generation programmes for its citizens in its budget of 2019. This led to the fiscal deficit of the government to rise to 2.4% of the GDP which is beyond the accepted limits of 2% of the European Union. Hence, the European Union Commission asked the Italian government to reduce its fiscal deficit in order to comply with the EU norms or face severe penalties of up to 0.5% of the GDP.
However, doing so would mean the government would have to cut out on employment generation programmes or drop some of its plans for the redevelopment of the economy. This would lead to its citizens going through at least one more year of unemployment and low standards of living. It is clear that the Italian government can choose either of the two. Either its citizens or the EU.
Negotiations and talks with the European Union Commission and its President Jean-Claude Juncker haven’t resulted in any resolutions or compromises from either side. With both sides in a deadlock, this clash could easily be a recipe for a disaster. Jean-Claude Juncker has expressed his feelings by voicing his thoughts, “Ti Amo Italia” and promising to do something about the situation. However, this looks more like a crowd-pleasing, fake promise in the form of rhetoric from the Commission President. Matteo Salvini, Italy’s most powerful politician, has voiced the government’s anger on the stance of the ECB and the EU on this matter, stating that “the enemies of Europe are those barricaded in the bunker of Brussels.”
This clash between Italy’s populists and the EU’s imperialists could all too easily set a chain of motions which would lead to far bigger problems for the EU. This time, the damage would be greater than Brexit or Greece, or both combined. All that is required is one decision of the government, one investor losing confidence or one bank failing. With the economists already predicting a global financial crisis, would Italy be the one to start it all?
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