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The greatest threat to the EU lies in Italy, a country on the edge

Italy - Credit: Archant

Is Italy Europe’s most dangerous nation?

For a British public which has been so engrossed in a general election triggered on the premise of EU negotiations, it is natural to assume that Brexit is the EU’s all-consuming challenge, since it is so prominent in our own national discourse. In Britain we are still sifted into Leave and Remain. Despite the lack of detail around the issue of Brexit in the general election, our politics will be dominated by departing from the European Union – the greatest peacetime challenge in living memory – for years to come.

For Europe, though, Brexit might not even present the greatest issue for the remaining 27 member states this year. Jean-Claude Juncker’s diary is understood not to give more than 30 minutes of time to Brexit a week. With the Netherlands and France safely out the other side of election campaigns that could have seen nationalists seize power, what else could concern the European Union as much in the months ahead? The answer is founding member Italy, whose 60 million inhabitants increasingly tire of the European project, and whose economy shows alarming signs of bringing the eurozone’s flaws into sharp relief. Italy’s economy teeters on the edge, and with it the fragile political support for the European project.

Italy is in trouble. It has been in trouble for some time, but a confluence of factors are bringing Italian economic woes to the forefront. It is expected by some analysts that the Italian economy will likely reduce in size this year as a result of a myriad of factors from the health of Italian banks to the country’s political disharmony.

One warning call comes from the ratings agency Standard & Poor, who caution of difficult times ahead. Italian growth has been low, and there are signs of alarm around the Italian economy, from high levels of public-sector debt to soaring Italian government debt, well above 100% of domestic output. Italian joblessness is more than 2% above the eurozone average. Italy’s economy is fragile, and fears about that are impacting upon European financial markets.

Italian economic confidence has fallen in recent data, and sluggish growth is part of the problem. Within the next year Italy faces elections, and as one of the eurozone’s largest economies, there is fear that the country’s economic malaise, coupled with the volatility of the debt-heavy banking sector could trigger a crisis. Such a crisis would not just have domestic economic effects, but political ones, and both could cause serious headaches for the wider European project. Any financial crash would put increased pressure on Italy’s political system, already turbulent from the resignation of Prime Minister Matteo Renzi at the end of last year.

Italy’s underperforming economy coincides with the exacerbation of the migrant crisis. The UN estimates that the number of people attempting to cross the Mediterranean into Europe has increased, and Italy has received approximately nine out of every ten migrants who have managed to arrive in Europe by sea – around 54,000. All of these issues are fertile political territory for extremist politicians like the former comedian Beppe Grillo’s Five Star movement, which won second place at a national level in Italy’s 2014 European Parliament elections. In 2013, Der Spiegel described Grillo as ‘the most dangerous man in Europe’, and he may yet prove to be a major risk to the European project. More a fan of Russia than Europe, Grillo’s party is just one of several eurosceptic parties in Italy who would exploit any financial wobble to push for Italian withdrawal from elements of the European project. The migrant crisis – another failure in management from the European Union – helps drive voters towards politicians whose policies would tear apart the EU.

Italian withdrawal, as the third largest economy within the eurozone, would spell the beginning of the end for monetary union, and would shake the foundations of the EU in a way that Brexit will not. A major continental economy, one of the ancient European civilisations, Italy’s departure would be catastrophic for the EU.

Within this context, Italian sentiment toward the eurozone is an alarming read for Brussels. Support for the euro in Italy has crashed to just 41% compared to a euro area average of 56%. Some 47% of Italians think that the euro is a bad thing for Italy. If Italy were to leave the single currency, the country’s exporting industries would benefit, but the impact on the rest of the eurozone would be immense.

Brexit would go from being an outlier to the start of a trend of European disintegration. Italy has to hold elections by May next year, with some suggestions that they may be held in conjunction with the German elections in September, and so months of political uncertainty for Italy and Europe await as Brexit negotiations get underway. European financial markets have already felt the impact of jitters around Italian banks, prompted by fears of an Italian election that might lead to a hung parliament, and yet more political uncertainty after Matteo Renzi talked up the prospect of an early election.

Back in January, Italy’s deputy foreign minister Mario Giro warned that the UK was entering into an economic ‘cold war’ with the European Union. More recently, Italy’s deputy finance minister Enrico Morando played down fears that Brexit would have disastrous consequences. The problem is, Brexit and any stumble in the UK’s economic fortunes will put pressure on the Italian economy.

When the UK leaves the EU, Italy faces the prospect not just of increased contributions to the EU budget, but potential barriers to the UK market, upon which it is reliant for exports. Already the UK is experiencing sluggish wage growth and increased costs of living. Along with the weakness of the pound, Brexit-shaped pressures will impact upon Italian businesses.

If anything, Italy’s precarious position provides good reasons to hope that the EU will push for a sensible Brexit deal that preserves the frictionless trading between the UK and countries like Italy. Brexit may not be the EU’s greatest problem, but indirectly Britain’s desire to leave the EU puts pressure on the real problem facing the European project.

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