Italy gives EU cause for concern even as Greece clears its debts
MONDAY saw the political milestone event of Greece officially completing an eight-year bailout programme following an economic collapse on the scale of the Great Depression. Yet, important as this moment could be for Athens and the EU at large, several European nations - including G-7 Italy - continue to have very difficult debt problems that could paralyse the eurozone again, politically and economically.
Today, it is Rome, not Athens that arouses most economic alarm in Europe following Italy's inconclusive general election this year that proved to be the midwife for a populist coalition of the political right that could yet shake up the continent. Rome is now perceived by some to pose perhaps the biggest threat to the eurozone's future because the country has the second biggest debt load in the single currency area after Athens (at over 130% of gross domestic product or GDP), and its banking sector remains under stress with big under-performing loans.
Moreover, Italy, unlike Greece, has long been at the political core of the EU project as a key G-7 nation which has the third largest eurozone economy. Hence another reason why a future crisis in Italy could be several magnitudes more concerning, both politically and economically, for Brussels than has been the case for Greece.
In this context, Greece's economic recovery in recent quarters is a ray of sunshine for the continent. When the third and most recent 86 billion euro (S$135.5 billion) tranche of bailout money was agreed in 2015, following the longest ever (17 hour) meeting of leaders of the eurozone, the president of the European Council Donald Tusk described it as "the most critical time in our history" given the then-growing possibility that Athens may have needed to leave the eurozone.
Even with the bailout package, in 2015 Greece was still facing the biggest potential political and economic maelstrom since the nation emerged from military rule in 1974. The country had just experienced its fifth general election in six years with the Syriza government winning most seats, but slightly short of an overall majority, raising concern over its governance.
BROAD SPECTRUM
Syriza, the first radical left party to win power in the EU in years, comprises a broad spectrum of political activists which includes socialists, anti-fascists and anti-globalisation campaigners, and this loose grouping only came together in 2012 as a single political entity. In 2015, the government faced an exceptionally tough political period because of significant intra-party tension as it implemented the bailout deal leading to several splits, including when a number of its parliamentarians broke away to form Popular Unity, a new anti-austerity party of eurosceptics. The stringent bailout package was widely politically unpopular in Greece and roundly criticised by former Syriza finance minister Yanis Varoufakis as a "new Versailles Treaty".
Yet, for all the political and financial pain that Greece has endured in the last decade, and its success in paying off its bailout package, the nation continues to labour under indebtedness of around 180% of GDP, and may still ultimately still need to leave the eurozone. While this possibility has been forestalled for now, the option could well come back on the political radar screen again in coming years, especially if the Greece falls back into deep recession again.
Yet, it is Rome, rather than Athens, where concerns over European debt are now turning. The fear here is not just that the populist political stripe of the government coalition there, but also that it may well be weak, unstable and incapable of securing the structural reforms that the country badly needs, thus raising the prospect of further political paralysis in a country which has seen more than 60 national governments in the post-war era.
Of most immediate relevance is that the new Italian government is preparing its annual budget - to be finalised this autumn - with Five Star and The League wanting to see significant new spending to address voter concerns over the continuing fragility of the economy with continuing high unemployment and low growth. Indeed, GDP per head is estimated now to be less than in 1997 at constant prices: only Greece has fared worse in the eurozone during this period which has fuelled the political success of the two anti-establishment parties now governing in Rome.
Only this week, Italy had asserted that its response to the tragic Genoa bridge collapse will be a "Marshall Plan" of up to a reported 80 billion euros aimed at restoring the country's infrastructure. The plan potentially also offers the government the opportunity to open the floodgates of wider fiscal stimulus and boost Italy's economy in other areas.
Other key political priorities for the government include the possibility of a new flat tax, and introducing a universal basic income. This is a package, welcome politically as it would be in some of Italy, which would add to tensions with Brussels as it could mean that Rome will drive a coach and horses through the eurozone stability and growth pact (under which governments keep budget deficits below 3 per cent of GDP) which The League and Five Star have long criticised.
With the EU refusing to blink, so far at least, over its longstanding budgetary rules, political relations could deteriorate badly in coming months. And this is in a context where the League's leader Matteo Salvini has previously asserted that he wishes Italy to leave the EU, while Five Star has called for a referendum on whether the nation should keep the euro single currency.
Taken overall, Greece's milestone comes as political and economic risks over Europe's debt are increasingly focused on Italy. The forthcoming national budget in Rome could become a major test of how serious the populist administration is of taking on Brussels over the EU's budgetary rules which could yet lead to a new crisis in the continent.
