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Italy: The Next Domino To Fall?

Italian Prime Minister Paolo Gentiloni announcing the formation of his cabinet, on 12 December 2016.

The resignation this month of Matteo Renzi the Prime Minister of Italy, may have ended the 63rd government in 70 years. His departure was the result of a voter rejection in a referendum, for a series of constitutional reforms. The changes would of enabled him to more easily enact legislation, that he deemed necessary to help the presently stagnate Italian economy.

Mr. Renzi joins the ranks of other European leaders, who have found that the electorate is growing increasingly impatient with the present political establishment. The Prime Minister perhaps unwisely, tied his political future to a successful outcome of the referendum.

David Cameron, former Prime Minister of the United Kingdom.

Prime Minister David Cameron, had made a similar tactical mistake in the United Kingdom. When British voters unexpectedly chose to leave the European Union in what has been titled the Brexit, his credibility lay in ruins. He had invested far too much political capital, with the idea that his country would remain in the bloc.

Unlike in the United Kingdom where the Conservative Tories will remain in power, in Italy the center to left government of Prime Minister Renzi is unlikely to survive longer term.

The flames of discontent had dealt the President of France his own dose of reality, when he was forced to acknowledge to the leadership of his own socialist party, that he could not win re-election next year. He has become the most unpopular president in the post war era.

Marine Le Pen
President of the National Front

A rising star in French politics is Marine Le Pen, who is now a presidential contender in the 2017 elections. Her vision is to take France not only out of the Euro-zone, but the European Union as well. As President of the National Front, she is campaigning to take the nation out of the common currency zone and towards full national sovereignty once again.

The National Front in France as a conservative nationalist movement, has been gaining credibility after years of economic stagnation, unpopular levels of immigration and more recently, rising incidences of terrorist activity.

Unlike the other major European powers, Italy has not been able to build a stable political apparatus. The multiparty system and its electoral laws, have made it difficult for the major parties to create a majority. Unstable coalitions have often been the result.

The present government that Mr Renzi is part of, is only one of four, that lasted more than a 1,000 days since the end of World War II. It came to power in February of 2014.

Matteo Renzi

His rise was made possible when he staged an internal party coup, against the more left leaning members of his Democratic Party. As a result, he became Prime Minister in September of 2014.

Prime Minister Renzi needed to pass difficult and somewhat unpopular legislation, in the interest of dealing with the economic and financial crisis Italy is now experiencing.

The referendum was about streamlining the legislative process, in order to facilitate the passing of these needed reforms. It would of changed 47 out of 139 articles, in the 68 year old document.

It would have shrunk the Italian Senate by two-thirds (from 315 to 95) and concentrated far more power in the hands of the Prime Minister. The balance of power between the central government and the 20 regions of the country, would of also been altered in favor of more federal control. This was a reversal of the devolution, that took place more than a decade ago.

If enacted the Senate would of become a more consultative body, with most legislation only needing to be passed by the lower chamber. The equal powers they now share, would end with the dismantling of bicameralism.

Five Star Movement
Movimento 5 Stelle

Despite a vigorous campaign by Prime Minister Renzi to win the approval of the electorate for these changes by use of the referendum, over 59% voted against it.

In the wake of the Renzi resignation, the Five Star Movement is now pushing for early elections. This conservative and nationalist party,is the largest opposition political party in Italy.

Like the National Front in France, Five Star would like to propose a new referendum. The voters would now be asked whether Italy should leave the Euro-zone.

A successful referendum would start the unraveling of the single currency, and further destabilize the European Union. This may well be, the ultimate goal of the Five Star Movement.

The Euro has been sliding in value, since the results of the referendum. Immediately after, it plunged to a new two year low. Parity with the American dollar is now expected in 2017.

The labor productivity levels in Europe in 2012. Italy is at the same level of the UK and Finland.

For now a caretaker government will be created, with the only real question being, how long until another general election?

Political pundits are already looking at the next electoral result. Although many except a fragmented coalition government, that will again struggle to pass needed legislation, there could be an alternative result.

Italian voters are tiring of a troubled banking system, insurmountable debt, stagnant wages, high unemployment and low economic growth.

In addition, many traditional Italians feel overwhelmed with the massive migration coming from North Africa and the Middle East. As a front line state, many would be immigrants are applying to remain in Italy itself. The endless stream of political and economic refugees, are putting a major strain on social services inside the country.

Migrants arrived in Lampedusa, Italy.

Over this past half year, these would be residents were arriving at 25,000 a month. This is the third year of the migrant crisis and voters are growing increasingly concerned, that far more of these new arrivals will be forced to remain in Italy.

Other nations in the European Union are becoming ever less willing, to take in additional refugees. This in turn, is creating a dangerous bottleneck on the northern border areas of Italy, as the migrants are being turned back by the surrounding countries.

Unemployment has remained between 11.4% and 11.7% during the last 15 months. The dip in youthful unemployment to 36.4%, did little to mollify Italian voters, even though it is at the lowest level since 2012.

Italian government debt to GDP (Gross Domestic Product) was at 132.7% in 2015.

Central Bank in Italy

Continued membership in the Euro-zone promises far more austerity, as the only way to deal with nearly out of control long term debt. This will mean ongoing lower consumer and government spending. It will also result in lower overall economic growth.

Unpaid bank loans are now near 990 billion Euros in the bloc, which is the equivalent of $1055.36 USD (United States Dollars). The Bank of Italy confirms that over one-third of that is owed to Italian banks. Estimates put it as high as 360 billion Euros.

The political instability and the increasing insolvency of the Italian banking sector, is leading to a fear that borrowing costs will rise accordingly. This will totally shut down any hope of an economic recovery in the near term, for the 3rd largest economy in the Euro-zone.

In order to temporarily stabilize the situation, the ECB (European Central Bank) has already announced it is ready to increase purchases of Italian government bonds. Banking authorities will do their best, to neutralize any further negative effects from the referendum.

Headquarters of the Central Bank in Rome, Italy

The fear is the higher yields on sovereign debt. This of course, will push the Italian government ever closer to bankruptcy. The government will be hard pressed to service the debt, that will become more more expensive, as the financial situation continues to deteriorate.

The banks in Italy are struggling under the burden of bad loans and limited opportunities for profit, in an environment of negative interest rates.

There are even reports that Italy may receive financial assistance from the European Stability Mechanism, in an effort to bolster the domestic banks.

Although Euro-zone rules specifically prohibit government led bailouts of domestic banks, the Italian government can attempt other measures.

The Treasury has already announced that if the effort to raise private funds at Monte dei Paschi di Siena for example fail, there will be some sort of recapitalization.

The aforementioned institution was founded in 1472, and is listed as the oldest surviving bank in the world. It remains the 3rd largest commercial and retail bank in Italy. The government cannot allow the bank to collapse.

The ECB has already rejected a bid by the bank, for extra time to raise capital among private investors.

In a worst case scenario, the Italian government can even nationalize some of the banks as a last resort.

Northern League Logo

Manfred Weber who leads the main conservative group in the European Parliament, has pointed to the rising popularity among Italian voters of the Five Star Movement and the anti-immigrant Northern League as a contributing factor, to more political instability in Italy and the European Union.

The situation in Italy, does give hope to similar movements in other countries, both within the Euro-zone and the European Union at large.

In the interim, the Italian President Sergio Mattarella, has moved to ask Foreign Minister Paolo Gentiloni to create a new government. The latter will need time to appoint a cabinet and then survive a vote of confidence in the Parliament.

There is little doubt that an election is likely in either April or May of next year. At that time, Italian voters will then determine, if their patience has run out with the establishment in its present form. Troubling for those currently in power, many citizens may have already decided.

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