It has been several months since voters went to the polls in Italy, yet last Monday we were seemingly none the wiser on the long-term political outlook for the third largest economy within the single currency.
The crisis had been on the backburner while the Northern League and the Five Star Movement were trying to cobble together a coalition to govern. Unfortunately, what they came up with wasn’t palatable to the interim president, Sergio Mattarella, who rejected the coalition’s mandate seemingly on the appointment of Paolo Savona as minister of the economy because he is a hard line eurosceptic.
Markets were understandably jittery last Monday which possibly had huge ramifications, not just for Italy but for the eurozone as a whole. In a scene reminiscent of the film, ‘The Italian Job’, where Michael Caine exclaims ‘You were only supposed to blow the bloody doors off!’, this crisis still has the potential to blow-up much larger than first feared. The Greek sovereign debt crisis and even Brexit might even pale in significance.
Last Friday did see some progress, however, with both the aforementioned parties submitting a new candidate, which was then approved. Whilst it is understandable that the EU supported this, the president didn’t want to appoint a eurosceptic as it is difficult to see what they could have done in the long run. Italians are very passionate people and therefore wouldn’t like to be told that the two largest parties, which they voted for, are not able to form a government. This move would only have cemented support for both the Northern League and the Five Star Movement if Italy needed to go to the polls again.
The harsh reality for the EU though is the fact that since the introduction of the euro, the Italian economy has gone absolutely nowhere.
Source: World Bank
Since the euro was introduced, the GDP per capita for Italy has actually declined, whereas the only beneficiary of the single currency, Germany, has greatly benefited. Understandably Italians want this to change, and both the Five Star Movement and the Northern League believe that the best way to do this is to increase spending.
Italian debt, as a percentage of GDP is already at 139 per cent, second only to Greece which stands at 179 per cent. This makes the UK at 88 per cent seem relatively modest.
Something has to fundamentally change thus allowing the Italian economy and other Mediterranean countries to become more competitive. While the EU won’t admit it, it is facing an existential crisis, and while the EU is trying to make Europe more inclusive, the rise of the populist parties should tell them that something needs to change.
However, the EU is not known as being receptive to change, and so Italy will increase its spending and debt, therefore increasing the uncertainty that they will be able to pay back their debts. Bond prices will fall and ultimately interest rates will rise.
We believe that any disaster has been averted for now, but this is not a solution to the problems faced. It is only temporary and like any averted disaster, solutions need to fix the source of the problems or the ramifications can be a lot worse further down the road.
Donald Maxwell-Scott is technical investment manager at Rowan Dartington. The views expressed above are his own and should not be taken as investment advice.