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Italy has no place in a doomsday scenario

Italy has no place in a doomsday scenario

From Pasquale Q Terracciano. Sir, In ‘Italy may be the next domino to fall’, Wolfgang Münchau has misplaced in my country a doomsday scenario

Sir, In a series of recent articles, the latest of which is “Italy may be the next domino to fall” (June 27), Wolfgang Münchau has misplaced in my country a doomsday scenario, which is more likely to happen elsewhere.

Italy is recovering from the direst global financial crisis in modern times. Growth in gross domestic product and employment is finally on the upside. This happened through a parallel path of institutional and structural reforms to streamline governance in both the economic and the political sphere. We pushed even more strongly for reforms when the European Central Bank’s quantitative easing and the fall of oil price could have done the job for us.

Italy has been running a primary surplus since 1995, with the sole exception of 2009. Thanks to the fully implemented reforms of the pension system, Italian public finances are the most stable over the long run in Europe, according to the European Commission’s latest Fiscal Sustainability Report. The reforms of the labour market and the banking system have consolidated investors’ confidence and the level of cross-border M&A in Italy in 2015 reached a record high, as well as foreign direct investment flows into the country.

Domestic macroeconomic solidity is of great importance for Italy. So are political stability and predictability. In times of economic and political uncertainty after Brexit, the latter would come handy for Great Britain too.

Pasquale Q Terracciano

Ambassador of Italy to the UK

available online: 

In reply to:

Italy may be the next domino to fall by Wolfgang Münchau (Financial Times of 27th June 2016)

Next domino to fall may be Italy, which has an October referendum

The UK’s vote to leave the EU will not only break the ties between the UK and the bloc, and probably between Scotland and England — it has the potential to destroy the eurozone. This is not the issue at the forefront of people’s minds right now. But it is potentially the biggest impact of all. I am convinced Brexit’s consequences will be neutral to moderately negative for the UK but devastating for the EU.

The main problem is not other countries wanting to hold EU referendums. The problem is more acute. The next referendum to be held in the EU takes place in Italy in October. It is not about the union but about Matteo Renzi’s constitutional reforms. The Italian prime minister is taking a gamble which is no less risky than David Cameron did.

He is asking the Italians to agree a number of reforms to streamline their political system. The proposals are sensible. But Italians view the referendum as an opportunity for a midterm anti-government vote. Mr Renzi promised he would resign if he loses. If he does, it will have been a monumental error of judgment on the scale of Mr Cameron’s. Opinion polls have been showing a small lead for Yes but they are likely to be as unreliable as those in the UK. My Italian friends are telling me Mr Renzi may well lose, in which case he would either resign immediately or call elections in early 2017.

The implications of Brexit for Italy are extremely troubling for three reasons. First, consider the economic impact. Italy’s economy has been in a weak recovery after a long recession. The British vote will have a significant effect on growth in the eurozone. But for Italy this means a reversion to a growth rate to below 1 per cent or worse.

Second, watch out for the Italian banks, which are woefully undercapitalised. A recent scheme to recapitalise the system has been a disappointment. The only options left to save it are a programme under the European Stability Mechanism, the rescue umbrella, which Mr Renzi will surely resist, or a break with a long list of EU rules on competition policy and bank bailouts.
Third, and most important, the political impact of a lost referendum will be disastrous. Either Mr Renzi keeps his promise to resign or he limps on to the next election. The technical details of the scenario that would then prevail are complex but the party most likely to benefit is the populist anti-establishment Five Star Movement. Beppe Grillo, its leader, last week reiterated his call for a referendum on Italy’s membership of the eurozone. As the results of the recent mayoral elections in Rome and Turin have shown, Mr Grillo’s party should not be underestimated.

The political dynamic in Italy is not much different from the one in the UK. The electorate is in an insurrectionary mood. The country has had virtually no productivity growth since it joined the euro in 1999. The Italian political establishment has until recently been as dismissive of its chances of losing the referendum as the British establishment was until Friday morning. They are still dismissive of the chances of a Five Star victory — and will be until the moment it happens.

In my view, that outcome is at least as probable as Mr Renzi emerging victorious from this mess. The Italian public has reasons to demand fundamental change. Unlike in the UK, unemployment there is high. Mr Renzi’s own administration has failed to break with corruption scandals and, most important of all, has failed to sort out the country’s economy.

A Pew Research Center poll on attitudes towards European integration in the largest member states suggests that the Italians and the Greeks view the EU’s economic governance most negatively. I am not surprised.

Nor am I surprised that people are beginning to blame the euro for the economic problems. An Italian exit from the single currency would trigger the total collapse of the eurozone within a very short period.

It would probably lead to the most violent economic shock in history, dwarfing the Lehman Brothers bankruptcy in 2008 and the 1929 Wall Street crash. But my sense is that those who would advocate an Italian departure might even relish bringing down the whole house.

To prevent such a calamity, EU leaders should seriously consider doing what they have failed to do since 2008: resolve the union’s multiple crises rather than muddle through. And that will have to involve a plan for the political union of the eurozone countries.

Britain is not the cause for any of this. The eurozone and its appallingly weak leaders are to blame. But Brexit may well be the trigger.

available online:


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