By Campaign Agent George Royce
In 2016 the Italian banks were beginning to show signs of collapse as the weight of the failing economy was showing its burden. Then at the beginning of 2017 the banks were almost at breaking point as the debt continued to mount without any signs of slowing down. On June 24 2017, the then Renzi cabinet conducted an emergency meeting. The cabinet ordered the liquidation of Banca Popolare di Vicenza and Veneto Banca. The largest Italian bank Intesa Sanpaolo took the positive assets from the failing banks and was given a helping hand of 5.6 billion Euros to support it initially. The Italian government also made ready another 12 billion Euros for any damage limitation needed and to fund additional operations. All together this 17.6 billion Euro government bailout of the banks was three times the estimated amount planned to keep the economy afloat. Essentially, the Italian taxpayers paid to keep their own economy from catastrophy.
Fast forward to 23 October 2018 and yet another crisis looms, but this time for the future vision of the Italian economy. The Italian coalition of Lega Nord and Five-Star has proposed a budget that has been rejected by the EU Commission. As one can imagine, this has caused a political fracas between Italy and the EU. The main reason for this rejection is because the budget sees the agreed 0.8% deficit allowance, raise to 2.4%. Italy is the fourth largest economy in the EU, but has the second largest debt, just behind Greece, standing at 132%. Valid Dombrovskis, the Vice President of the Commission, said Italy’s current plan did not seem to be in line with the EU’s Growth and Stability Pact.
The Italian people have become incredibly frustrated at the state of the economy; they have been living with cuts and stagnation of the infrastructure since the 2008 financial crisis. The coalition’s economic aim is to end or at least loosen austerity and pump money into the economy. Lega and Five-Star are standing at a combined approval rating of 60%. Both Salvini and Maio have wanted to shun the Euro but have not been able to muster their true opinions into policy. The fact that the EU has rejected this new fiscally loose budget that would have given more funding to services like the government-run job centres, will potentially turn more Italians against the EU. Italy’s overall unemployment rate is 10.1% and the youth unemployment rate is a staggering 31.6%. The sentiment in Italy is, that after such mishandling of the economy for so long, the government is planning to inject money into the infrastructure of the country so that these kinds of woes can be tackled.
As one might expect, a war of words broke out between the EU and the Italian coalition. Having just stabilised the situation in Greece, the EU does not want another banking crisis on its hands. However, things are different this time; Italy is a large economy and an EU member. Notably, now that the UK is leaving there shall be less ‘EU funding’ to spread around. And with big plans like the EU Army on the horizon, and of course the migrant crisis still ongoing, the Commission is trying to hold onto as much authority as possible.
Italy however changed course in March of this year, and both the Five-Star Movement and Lega Nord vowed to be fiscally relaxed. Salvini responded by saying vehemently “no one will tolerate a single Euro being taken off the budget.” His left-wing coalition partner Maio echoed this sentiment by saying “Brussels doesn’t like this budget, because it was written in Rome.” Maio’s comments are particularly convincing because the EU’s Growth and Stability Pact has a deficit limit of 3%, and the Italian budget is obviously short of that. It seems like when the budget was being created, there was an effort to stay away from the limit, yet still it was rejected.
Those that are familiar with how the EU operates have argued that as ever, it's one rule for Germany and France and another for every other EU member. Germany’s budget deficit in 2003 when the same rules were in place, was 3.8% with 3.5% the year before. France’s budget deficit in the same year was 4% with 3.1% the year before. The EU Commission did object and talked a tough game but in the end, when the finance ministers of both countries were summoned to Brussels, it was agreed that Germany and France would not be fined for breaking the rules.
After the budget was rejected Moody’s downgraded Italy’s debt to Baa3 rating which is just one level above junk bond status. Italy’s 10-year government bond fell to a yield of 3.307% but since rose back up to around 3.474%.
The EU Commission has given Italy 3 weeks to come up with a new budget but it doesn’t seem like Salvini will budge saying on the same day the budget was rejected “This doesn't change anything, let the speculators be reassured, we're not going back.” He proclaimed a sentiment that is being felt back home by commenting that the EU is not just attacking a government but a people. A telling remark of the changing mood in his country, he stated “These are things that will anger Italians even more and then people complain that the popularity of the European Union is at it's lowest.”
And that is where this battle is commencing. Salvini and Maio want to relinquish the control the EU has over Italy’s economy and recently it's borders too. Both have flirted with abandoning the Euro which the EU does not want. However the EU is coming from a perspective that it does not want to set a precedent of not managing debt. The strange thing is though, Italy is playing by the rules but the EU is not abiding by it's own.
What the repercussions will be is not yet known but with a high approval rating, the Italian coalition doesn’t seem to be the side that will blink first.
Sources and further reading
Jorge Valero, ‘Liquidation of Italian banks shows limits of banking resolution rules’, Euractiv (27 June 2017)
Sonia Sirletti, ‘Italy agrees to €17bn bailout of two more banks in biggest ever rescue plan’, The Independent (26 June 2017)
Francesco Guarascio, ‘EU wary but cautious over Italy's budget plans’, Reuters (28 September 2018)
‘Italy Unemployment Rate’, Trading Economics and National Institute of Statistics
‘Italy Youth Unemployment Rate’, Trading Economics and National Institute of Statistics
‘Greece emerges from eurozone bailout programme’, BBC (20 August 2018)
‘Deficits and defiance’, The Economist, (2 September 2003)
Mark Tran, ‘France and Germany evade deficit fines’, The Guardian (25 November 2003)
Anneken Tappe and Sunny Oh, ‘Here’s why Italian bonds rallied after Moody’s downgrade’, Market Watch (22 October 2018)
Agence France-Presse, ‘Salvini defiant over budget despite EU giving Italy three weeks to come up with new plan’, The Telegraph (23 October 2018)