• Type:
  • Genre:
  • Duration:
  • Average Rating:

Giuseppe Conte

Will Italy leave the European Union

Following a decrease of 0.1% in the third quarter of 2018, Italy’s economy contracted of 0.2% in the final quarter of the same year. As such, Italy is now officially in technical recession; just when it seemed to be recovering from the effects of the debt crisis. This has sparked an intense political debate and has cast doubts over its economic prospects. But what does this actually mean for Italy and the EU?

Technical recession: the domestic debate

The news that Italy has entered into technical recession have immediately triggered a mutual-blaming quarrel between political forces. The governing coalition formed by the Five Star Movement and the League attributed the fault to the former ruler, the Democratic Party; who, on its part, accuses the economic policies of the current executive.

In reality, the situation is way more complex, and the responsibility cannot be ascribed to a single reason. As in all economic issues, there are multiple factors in place whose interplay determines the growth on a given period; therefore, it is difficult to clearly find out who or what is responsible. Economic performance is a long-term issue. Amazon’s CEO Jeff Bezos once said that “if we have a good quarter it’s because of the work we did three, four, and five years ago. It’s not because we did a good job this quarter”. His sentence does also apply to states. So, part of the responsibility can be imputed to the previous governments who, in spite of having managed to reassure the markets and bring Italy back on the path to a limited growth, failed to reduce the country’s huge debt. But it is equally true that the current executive, in power since June 2018, has raised the concerns of investors with the economic policies it has implemented or proposed.

First, it attempted to adopt an expansionary fiscal policy to boost growth by increasing public expenditures. However, this alarmed the EU Commission: even though Italy’s budgetary plan did not break the Union’s rules, it was still considered too risky as it would have caused a fiscal deficit and increased the already enormous public debt. This resulted in a standoff that was ultimately solved when the Italian government partially backed down and reduced the planned spending. Yet, the episode caused stress on the financial markets and harmed trust among investors. Another controversial topic in the economic policy of the incumbent government is the introduction of a basic income for unemployed people: it would increase public spending, but its future benefits are dubious.

Technical recession: the external factors

Apart from the policies of this government or the previous ones, there are many other external factors that the executive cannot control and that probably have had a more important impact on Italy’s economic performance. The country’s GDP contractions comes amid a global slowdown. The growth of the EU as a whole has been limited to 0.3% in the final quarter of 2018. There are some issues on trade as well. China, the world’s second-largest economy and a non-negligible export destination for Italy, is also growing at a slower pace than before. Problems exist also with another and more important trading partner: the United States. President Trump’s protectionist policies have surely had a negative impact on the EU and on Italy. At the end of May 2018 the US imposed 25% tariffs on steel and 10% ones on aluminium. In 2016, Italian metal exports to the US were worth almost 2 billion dollars. This is not an impressive figure, but more important industries could soon be hit and this eventuality could have had an impact. Trump is threatening to put tariffs on cars, that always in 2016 represented 9.5% of total Italian exports to America for a total value of more than four billion dollars. Again, this is not an extraordinary amount, but the spill-over effects on related industries should also be considered. The EU is trying to reach a deal on trade with the Trump administration, also by menacing to impose counter-tariffs wort 23 billion dollars on US products, but in case it fails Italy will surely be negatively affected. The looming possibility of a no-deal Brexit in recent months might also have had a role. The UK is a more important destination for Italian export than China and the US, and the prospect of a no-deal scenario may have had an impact, even though it is still too early to evaluate this. But the most important point probably concerns energy supplies. Italy is dependent on petroleum imports, and the price of oil surged in 2018 to reach the climax at the beginning of October, thus covering much of the period in which the Italian economy has contracted. The price went down since then, and the effects will probably be felt in the coming months.

These are only some of the numerous factors that may have determined Italy’s recession in the second half of 2018. What is important to understand is that the issue is very complex and easy explanations are not effective indicators of the reasons behind the GDP contraction. But what about the future prospects for Italy? Will it leave the Eurozone?

A prelude to leaving the Euro?

Since the debt crisis of 2011 and the subsequent austerity policies, Euroscepticism has become common in Italy’s political discourse. EU institutions were criticized and perceived as technocrats at the service of financial interests, and some even advocated for Italy to abandon the EU or at least the Euro. The most recent recession, albeit marginal by now, might reopen the debate, especially if it were to continue. After all, the two ruling parties were among the most vocal anti-Euro political forces, even though they took more moderate positions later on.

This is a political choice that Italy will have to make, but it will have of course major economic implications. According to the optimum currency area theory, it is economically beneficial to have a single currency in case the region is strongly integrated by intense trade exchanges and a great mobility of production factors. So, a country evaluating whether to enter or leave a common currency area should assess its degree of economic integration with other participants. As a matter of fact, the higher the level of integration, the greater are the benefit and the lowest are the costs of renouncing to monetary sovereignty to have a single currency. For what concerns the benefits, the main advantage of a common currency is to eliminate transaction costs due to exchange and interest rates and their variation. If the economies are closely intertwined with an elevated trade volume and a strong mobility of workers and productive factors, having different currencies brings very high costs that partly eliminate the gains of trade; and adopting a single currency removes these costs. But having a common currency also brings its own costs, because it makes it impossible for states to use monetary policy to counter asymmetric economic shocks, namely recessions that hit only that country but not others. If it has its own currency whose value can freely float, its automatic depreciation will boost export and counter the economic slowdown. But if it has renounced to its monetary sovereignty by adopting a common currency like the Euro, this mechanism is impossible. However, a high degree of economic integration minimizes this inconvenience, as it also allows to reduce the recession’s effects. If the country’s economy is closely intertwined with that of its fellow partners, the diminution of the price of its products will encourage others to buy them, thus increasing its exports. Similarly, if there is a high mobility of workers, then jobless people will be able to emigrate to other countries thus re-equilibrating the domestic labour market. In short, if the economies are strongly integrated, the benefits of having a single currency are high and the costs are low; so, it is wise to adopt the common currency. Now, is it the case of Italy?

For what concerns trade, in 2016 Italy’s exports to Eurozone alone was worth 192 billion dollars, over a total amounting to 450 billion. In the same year, its imports from other Eurozone countries amounted to 207 billion on a total of 397. This shows the importance of its exchanges with the other countries using the Euro. Moreover, its economy is also integrated with the Eurozone via mutual investments, expats, joint-ventures, services and others. If it abandoned the Euro, then it would lose all the advantages of having the same currency as its main economic partners. In addition, if it came back to the lira it would have to face the short-term shock. The currency would rapidly depreciate, and while it is true that this would boost export, it would also bring back consistent transaction costs. Moreover, inflation would erode the people’s purchasing power and there would be deep consequences on its debt with soaring spread and strong difficulties to obtain new loans. The situation would surely stabilize with time, but all in all, this does not seem to be an economically-convenient move for Italy.

Conclusion

The fact that Italy has entered in technical recession is surely no good news for it and the EU. Blaming each other at the political level will not solve the issue, also because there are many factors at play and responsibility cannot be fully attributed to anyone. Much will depend on future economic developments; but the contraction is limited by now and, in spite of the Eurosceptic positions of the current government, there is nothing that indicates that Italy will leave the Eurozone anytime soon.

What is the role of Italy in Europe?

Italy is facing a delicate political and economic situation. Once a centre of the Western Civilization, it gradually lost its centrality throughout the centuries. More recently, it plunged in a severe recession following the global financial crisis, and it has shown signs of recovery only in the past few years. Yet, it remains the Eurozone’s third largest economy and fourth in the EU as a whole, and it remains one of the most influential countries in the Union, of which it has been a supporter for decades. However, the current coalition government formed by the Five Star Movement and the League is casting doubts over Italy’s commitment to the EU, and notably over its budgetary rules. This in turn raises concerns over its own economic recovery and also on the tenure of the EU as a whole, which is caught between two diverging views of European integration.

Italy’s contribution to the Western Civilisation

The Italian Peninsula was first unifed under a single political entity by the Romans, whose legions ultimately conquered a vast Empire centred on Italia. But after a long decline, it ultimately fell during the 5th century AD. Yet, it left an immense cultural heritage, itself a product of the contacts with conquered peoples, first and foremost the Greeks; without which modern-day Western civilization would not be the same.

But after the demise of the Roman Empire, Italy has been divided for centuries. Yet, it continued having a huge influence over Europe in cultural, economic and also political terms. The Italian Maritime Republics played a pivotal role in trade, and following the Crusaded they established outposts in the Outremer that became one of the main vehicles of contact with the more advanced Islamic world. Italy was also an important manufacturing centre, and modern finance finds its roots in its economic activities, notably those of Venice and Florence. This, of course, had a political spillover. The Fourth Crusade, which ended with the occupation of Constantinople for nearly sixty years, was largely driven by Venice’s economic interests. A family of businessmen, the Medici, managed to transform their wealth in political influence and took power in Florence. Italy’s northern cities played a central role in the long struggle between the Papacy and the Holy Roman Empire, and their quest for autonomy kept the latter busy for decades. As a result of this economic prosperity, culture flourished: be it in literature, art, philosophy or other fields. In Europe, only the cities in the Flanders and those of the Hanseatic League could rival the Italians. As for the South, it was the setting of intense cultural interchanges, especially with the Byzantines and the Arabs; which made of Sicily a major cultural centre that, along with Spain, allowed the reintroduction in Europe of many Classical works that had been forgotten. All this gave a fundamental contribution to the period of cultural and economic revival known as the Renaissance; which left an immense heritage to today’s Europe.

Yet, Italy was politically divided. Various city-states rose and fall, but none of them could become powerful enough to unify all the land, as others always formed a coalition to block its expansion; often with the aid of foreign powers that frequently invaded the Peninsula. Starting from the XVII century, its economic and cultural prominence also started declining in favour of the rising nation-states like France, Spain and England.

Reunification & World Wars

After centuries of division, Italy was finally unified in the 19th century following a long process known as Risorgimento. Under the able statesmanship of Cavour, the Kingdom of Sardinia (whose centre was actually in Piedmont) managed to unify most of the Peninsula; thus proclaiming the Kingdom of Italy in 1861. The new state soon started a modernization process that marked its rise among Europe’s main powers; even though it never got close to France, Britain, Germany or Russia. Its industry developed, and with it the military. With time, it also managed to gain some colonies in Africa.

Italy fought alongside the Allies in WWI, and was among the victorious powers. But right after the conflict, Italy found itself in a troubled economic situation due to the huge costs of the war. In the early 20s, the country was in social turmoil. The socialists and the recently-created Communist Party were gaining influence; resulting in mass demonstrations during the “Red Biennium” of 1919-1920. Fearing a revolution, the government attempted to exploit another movement to counter the left’s rise: the Fascists led by Benito Mussolini. However, the situation soon went out of control. In 1922, the Fascists marched in arms on Rome; and with a decision that would later cause much debate, the King appointed Mussolini as head of the government to avoid a civil war. Soon, Mussolini dismantled the democratic order and established a dictatorship. Its legacy is highly controversial, notably as it ended up allying with Nazi Germany and collaborating with it during the Holocaust; but in terms of power politics Mussolini managed to extend Italy’s territory, to strengthen its armed forces and to make of Italy one of the main players in the international politics of the time. Yet, as before, the country remained globally weaker when compared to other powers.

Yet, the overall balance of the fascist regime is definitely negative. In 1940 it brought Italy in a conflict it was unprepared for and which ended up in a catastrophic defeat. Additionally, since September 1943 Italy was split in two: the south, liberated by the Allies, joined them in the war against Germany; while the north and centre of the country became a puppet state controlled by the Nazis. This resulted in a civil war; not only between the two states, but also between the partisans on one side and Fascist supporters plus the German troops on the other. This conflict left a deep mark on post-war Italy and on its national identity.

Italy after WWII 

When WWII ended, Italy was in ruins. After a complex political process, it became a Republic in 1946 and adopted a new Constitution two years later. Like Germany and Japan, this also included provisions meant to avoid that the country may undertake once again an expansionist policy; but it was still authorized to have its own armed forces for strictly defensive purposes. The Christian Democracy became the party around which Italian governments would be formed for the decades to come. In foreign policy, Italy joined NATO in 1949 and the European integration process in 1951. But in spite of its alignment with Western powers, the Communist Party was very strong, and it remained the main opposition force until the 90s. In economic terms, Italy soon experienced an extraordinary GDP growth: during the 50s, its size grew of almost 6% per year on average, and this figure was constantly higher in the five years between 1958 and 1963. This expansion was equal or superior to that of most European countries, and it completely transformed Italy by making of it one of the continent’s main economies. The factors behind the “economic miracle” are multiple; and include the large and cheap labour force, foreign aid received via the Marshall Plan and the advantages of economic integration with fellow Western European countries.

Yet, with time this growth slowed down, and Italy was surpassed by other economies. Again, there are multiple reasons. The oil shocks in the 70s hit the country, as it was (and remains) dependent on energy imports. But Italy also lost its competitive advantage as salaries and costs grew. To counter this, the governments used to devaluate the lira to make exports cheaper; but this was just a short-term and ineffective solution, because it soon caused inflation which in turn had detrimental effects on competitiveness and on foreign debt. In the end, also in the optic of adopting the Euro, starting from 1987 Italy decided to respect the communitarian monetary rules and stabilize the Lira, thus ending decades of devaluation-inflation cycles to appreciate the currency, reduce inflation and converge with other countries. But a series of factors caused a crisis of the Lira in 1992, which resulted in a severe devaluation. Still, after implementing corrective measures, the path towards adopting the Euro continued. Italy tried to align its macro-economic parameters with those of fellow countries and to respect the rules on debt and public deficit. So, in spite of the scepticism of other states (notably Germany) and of not respecting completely the convergence criteria, Italy was allowed to adopt the Euro in 2002.

In the meanwhile, significant changes also occurred in international and domestic politics. Right after the dissolution of the USSR and the Warsaw Pact, the Italian Communist Party was dismantled. But the Christian Democracy was also fundamentally shaken by a series of investigation on corruption, and it disappeared as well. The political order that had lasted since the late 40s was over, and even though the Constitution was not modified, this marked the passage to the “Second Republic”. In the new context, media magnate Silvio Berlusconi rapidly became a prominent politician by exploiting his wealth and the very media he owned. Another emerging political force was the North League: evoking the struggle of the northern cities against the Empire during the Middle Ages, it advocated for secession of the rich regions of the north or at least for more autonomy. Yet, Italy continued to experience political fragmentation and frequent changes of government.

In 2011, the country was shaken by the debt crisis that had begun in Greece, itself a consequence of the US financial crisis of 2008. The government in charge resigned and was substituted by a “Government of Experts” chaired by economist Mario Monti, who soon adopted austerity measures to restore financial stability. Still, the economic recovery was sluggish. This, combined with the immigration crisis, finally led to the victory of two populist and Eurosceptic parties in the 2018 elections, namely the Five Star Movement and the League (which had unofficially dropped the label “North” in an attempt to become a nation-wide party). After a long deadlock, they formed a coalition government whose orientations have created concerns in Brussels, especially over economic policy.

Italy and the EU

The Italian government has recently presented a budgetary manoeuver that is considered too risky by the EU, and this has led to a vivid political skirmish between the two sides.

The Italian executive wants to implement expansionary policies to boost domestic consumption and consequently economic growth. These include tax cuts and a much-debated basic income for the lower classes. But this would bring the public deficit to 2.4% of the GDP; which, even though it does not exceed the legal gap of 3%, is considered too high by the EU. As a matter of fact, the Commission fears that the stimulus will not be sufficient to foster growth and that the only result would be to put further strain on Italy’s public debt, which is already at almost 132% of GDP against a limit of 60% demanded by EU rules; thus damaging its financial credibility and nullifying the progress it has struggled to make in a decade of austerity. But the Italian government has rejected the requests to modify the budgetary manoeuver, on the basis that it is up to Italians to decide and that they are not compelled to respect the demands of EU institutions, often portrayed as a diktat in the executive’s discourse. Italy has also found some international support, notably from US President Donald Trump, who in August had offered to buy Italian bonds. While it is legally possible, considering that Italy is now challenging the EU, the Union’s institutions may perceive this as an unnecessary intromission.

Assessing what will happen to Italy is hard, but the government’s economic policy does present some risks that may harm the country’s growth, which may result in new EU-backed austerity measures. But the greater danger is political: if the feud continues escalating, unpredictability will damage both parties and in the worse scenario may even lead to Italy’s exit from the EU, which would be another severe blow to the European integration project in a moment where Brexit is also unfolding along with vivid discussions between the Visegrad countries and the EU institutions. As we examined in another video, this divergence over the nature and the powers of the EU is the kind of “civil war” that may ultimately threaten its tenure, with unpredictable economic and political consequences.

Scroll to top