Grexit is one thing. What if it happened in Italy?

Polls show that more than half of Italians would vote to leave the single currency. Also, if things go bad, refinancing Greece for two hundred odd billion is one thing, Italy’s debt is more than two trillion. Grexit would be huge, but Itexit would spell catastrophe

The markets in Rome are priced in euros. But for how long?
Tim Hedges
On 1 July 2015 08:47

It seems referenda on Europe are all the rage. Of course, the authorities in Brussels hate this democracy stuff. As we saw over the European Constitution, the proletariat simply cannot be trusted to give the right answer.

For the euro-apparatchiks, the way to sort out disagreement is for the right people (them) to discuss it over a series of lunches paid for by the taxpayer and come to a conclusion which fits the overall plan of ever closer union.

They have made clear their anger at this dangerous new outbreak of populism by withdrawing the offer on which the Greek people will vote.

Italy is in a strange position here. There seems on the surface to be calm on the subject: Prime Minister Renzi has been lecturing his counterparts on being good Europeans on the subject of immigration (albeit without much success).

Meanwhile Finance Minister Padoan has made a thoughtful speech to the effect that what little disturbance might come from a Greek exit from the euro will easily be handled by the European Central Bank. All good European stuff in one of the founding countries of the European establishment.

Yet under the surface there lurks discontent. The bulk of the Opposition, Berlusconi’s Forza Italia, the Northern League and Beppe Grillo’s 5-star movement, are against Italy’s membership of the euro. And polls show that more than half of Italians would vote to leave the single currency.

If  there were a vote, either in parliament or in the country as a whole, over the next year, there is an evens chance it could go against the euro. Of course while everything is going swimmingly there is no reason for the lunchers in Brussels to be concerned. What could cause a vote is a crisis.

It is easy to agree with Pier Carlo Padoan that Greece’s departure from the Eurozone would not of itself cause a crisis. Greece is small and defences of a sort are in place. However the Greek debacle is not happening in a vacuum.

America is on the point of raising interest rates. This is likely to cause havoc in emerging markets and waves all over the world. At present Italian bond yields are lower than those of the USA. What will be the appetite for Italian risk as US rates rise on the back of a strong economy?

And the markets are aware of the fundamentals. Italy may have returned to growth --less than 1 percent is forecast -- but improvement will be impossible unless it makes further supply-side reforms. Renzi’s jobs act has passed, making hiring and firing more easy, but Italy is still one of the worst places in the world to do business.

Despite recent falls in the euro, for Italy’s economy it is still overvalued by 15-20 percent. Despite Renzi, the legal system is unreformed and corruption is rife.

And there is no plausible scenario for substantial growth, let alone 5 percent a year, which would make it possible for Italy to start paying down debt. Italy, like Greece, needs to be forgiven a chunk of its debt, but nobody mentions this. It is the prime example of kicking the can down the road.

Europe is happy to keep kicking that can because the problem is simply too awful to confront. Because it knows one other fundamental figure: it cannot do anything about a run on Italian debt. Refinancing Greece for two hundred odd billion is one thing. Italy’s debt is more than two trillion.

So the threat of Grexit is not a problem for Italy. The matter will not be discussed and the people will not be asked. But whatever the outcome for Greece, Mr. Tsipras has changed one thing. Italy, and therefore Europe, is now just one more crisis away from disaster.

Tim Hedges, The Commentator's Italy Correspondent, had a career in corporate finance before moving to Rome where he works as a freelance writer, novelist, and farmer. You can read more of his articles about Italy here

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