Italy’s po­ten­tial down­fall could prove fa­tal to EU

The Globe and Mail (Alberta Edition) - - REPORT ON BUSINESS WEEKEND -

ERIC REGULY EURO­PEAN BUREAU CHIEF ereg­uly@globe­and­mail.com

Which coun­try is deeper in the hole, Greece or Italy? Ob­vi­ously Greece – the coun­try has been in near re­ces­sion or de­pres­sion since the 2008 fi­nan­cial cri­sis.

But ex­tend the mea­sure­ment pe­riod and it is Italy that emerges as the dud econ­omy. Be­tween 1998 and 2016, real gross do­mes­tic prod­uct per per­son in Greece rose more than 3 per cent, sug­gest­ing the poster child of the Euro­pean debt and eco­nomic cri­sis is still wealth­ier now than it was two decades ago – as in­cred­i­ble as that sounds. Italy? Real GDP per per­son is ac­tu­ally down 0.4 per cent since 1998, mak­ing it the big loser among the 19 Euro­pean Union coun­tries that use the euro.

Italy’s de­te­ri­o­ra­tion was one of the main mes­sages at this week’s an­nual con­fer­ence of the Ri­mini Cen­tre for Eco­nomic Anal­y­sis, an Ital­ian eco­nomic think tank. Speaker af­ter speaker trot­ted out data that made you think Italy is bent on em­brac­ing what we used to call Third World sta­tus (dis­clo­sure: I am a trus­tee of the RCEA and was a speaker at the con­fer­ence).

Why should any­one care about Italy’s down­fall? Italy is more than the land of prosecco, Ro­man are­nas and Michelan­gelo. It is a Group of Seven coun­try and the euro zone’s third-largest econ­omy. It is Europe’s sec­ond-big­gest man­u­fac­turer, af­ter Ger­many, and has the du­bi­ous dis­tinc­tion of over­see­ing the world’s third-largest debt mar­ket. With some €2.2tril­lion ($3.3-tril­lion) in li­a­bil­i­ties, its debt-to-GDP is about 135 per cent, up from about 100 per cent a decade ago.

In other words, the EU and the euro zone are goners if Italy fails and the mes­sage would not be lost on Em­manuel Macron, the new French Pres­i­dent, and Ger­man Chan­cel­lor An­gela Merkel. While they would never ad­mit it pub­licly (Italy must be a Latin zom­bie land to them) the great­est risk to their plans to make the EU stronger and more in­te­grated.

Be­fore Mr. Macron was elected, the EU and the euro zone were in trou­ble. Bri­tain had de­cided to bolt from the EU and pop­ulist par­ties were on the rise across the con­ti­nent. With Mr. Macron and his en­thu­si­as­tic, pro-EU and proeuro poli­cies firmly on the agenda, there is a new sense of op­ti­mism in Europe. It is based on the gen­eral be­lief the Franco-Ger­man al­liance has been saved and could rein­vig­o­rate what’s left of the EU. But can Mr. Macron and Ms. Merkel per­suade the Ital­ian gov­ern- ment to get its re­form act to­gether? They’ll try, know­ing that France and Ger­many alone can­not save the EU.

Their ef­fort could fail. While Italy is out of re­ces­sion, vir­tu­ally every eco­nomic in­di­ca­tor is a na­tional and in­ter­na­tional em­bar­rass­ment. Its growth rate is half the euro zone av­er­age. At ex­pected growth rates, the coun­try will not reach its pre-2008 GDP level un­til 2025. Unem­ploy­ment rates – 12 per cent na­tion­ally and 35 per cent among the young – are atro­cious. Ditto pro­duc­tiv­ity growth and bar­ri­ers to com­pe­ti­tion. The World Bank’s lat­est ease-of-do­ing-busi­ness sur­vey puts Italy in 50th spot, be­low Ser­bia, Moldova and Rus­sia .

The grim num­bers are not the big­gest prob­lem. Politics is. There is lit­tle ap­petite for re­form in Italy. The pre­vi­ous prime min­is­ter, the al­legedly re­form-minded Mat­teo Renzi of the cen­tre-left Demo­cratic Party, cut short his Save Italy cam­paign when he re­al­ized it would cost him votes as the coun­try’s pow­er­ful lobby groups, from taxi driv­ers to pen­sion­ers, dug in. He re­signed in De­cem­ber, when he lost a ref­er­en­dum on con­sti­tu­tional changes.

His bid to be­come the next prime min­is­ter has been jeop­ar­dized by the rise of the Five Star Move­ment (M5S), the pop­ulist Eu­roskep­tic party that is lead­ing in the polls and whose eco­nomic poli­cies are ill-de­fined. If M5S wins, the grand French-Ger­man plan to jolt the Euro­pean project and growth back to life would be thrown into re­verse. If Mr. Renzi wins, the proven Ital­ian trend of stum­bling from one cri­sis to an­other might re­main in­tact.

Italy faces a choice: re­form and add mo­men­tum to the Euro­pean project, or choose not to re­form and re­main a drag on the project. In time, the lat­ter choice would surely see it dis­missed from the euro zone or make it a ward of the EU and the In­ter­na­tional Mon­e­tary Fund, a Greece writ large.

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