Europe has not yet recovered from the shock of Brexit, and there is an emerging new crisis in Italy.
The European Union is once again at a crossroads. After Brexit, it is now Italy new referendum that is the cause of anxiety. And there are more than one reasons to worry: Italy being the third-largest economy in the European Union alongside Germany and France, and the biggest fighter for survival and reorganization of the European Union is the primary one; the outcome of the constitutional referendum is the other. The future of Italy and the EU is again distressed.
After the failure of his proposal on constitutional change in the referendum, supported by 40 percent of voters and 60 percent against, Renzi has already resigned. Although it is indisputable that the reform would bring greater power to the government, at the same time it would significantly facilitate the adoption of laws and eliminate bureaucratic delays, which would reduce the political instability and public spending.
Now, however, many questions rise regarding the future of Italy. Though Italy is a large and developed economy, its economically-political situation has been far from agitation. Unemployment of just about 12%, lower economic growth, a huge debt of 133% of GDP,(the largest in Europe, right after Greece), and growing public discontent because of the large number of migrants, cannot go in favour of the current government.
However, the biggest issue which Italy is currently facing, and which is particularly affected by the result of the referendum, is the insolvency of Italian banks with 360 billion Euros of bad loans. The most looming candidate of the lot is the world’s oldest bank, Monte dei Paschi di Siena, with 46.9 billion Euros of problematic debt. The bank’s coping mechanism is a whole new story. After the European Central Bank called on to reduce the high level of non-performing loans, the share price began to fall and the same trend continued day after day. Another negative influence has been Brexit, with the City of London being the largest financial market. Lesser retail lending, and lesser economic growth has been a discourager. Citizens are not willing to put themselves at risk, in a stagnant economy.
After the referendum, a further bailout of the largest Italian bank Monte dei Paschi di Siena is also questionable. Though experts predict that Monte dei Paschi won’t be able to find private investors who will give 5 billion euros for debts worth only 1 billion euros, they hope to succeed, because investors will get bonds with a government guarantee. But now this can be a problem because no one is willing to invest in a country that is unstable, and Italy is now certainly is.
The fact that the yield on 10-year Italian government bonds rose to 2%, while in Germany, for example, is only 0.3%, shows the risks of investing in the Italian economy. It is known that the yield increases as the uncertainty of investment rise, and for Italy the future is very uncertain. Given that in Italy there are a few Eurosceptic opposition parties, such as the Five-Star Movement, the question is how the referendum’s result will affect Italy’s membership in the EU. Although 58% of Italians still see the EU as a better solution for Italy, more and more Italians raise their voice against the ways that Brussels is solving economic problems and the migrant crisis. Will Italy follow the footsteps of the United Kingdom? Many are afraid of that, especially because of the election fever in France, Germany and Netherlands.