Two weeks after Britain voted to leave the European Union, Italy is now the latest European nation to come under the spotlight.
The country’s financial sector is on the brink of collapse, and a referendum on constitutional reforms in October has the potential to topple prime minister Matteo Renzi’s government and cause an unprecedented political crisis.
All of this has sparked fears that Italy could be the country to spark the eventual collapse of the European Project, notably from notoriously bearish Societe Generale strategist Albert Edwards, who describes Italy as the “weak point in the eurozone both economically and politically” in his weekly Global Strategy note.
Here’s an extract from Edwards (emphasis ours):
My own view is that I believe it is only a matter of time before the eurozone project fractures. Clearly the UK referendum has not helped matters. For me the problem is Italy and France in that order. Why? Because you have got disaffected populations in too-big-to-fail economies who are disillusioned with what the eurozone project has delivered in terms of employment and economic growth. AND much more significantly, you have major opposition parties who are committed to leaving the eurozone and who would be likely to do so if they were to attain power.
Edwards continues by noting that he does not believe Italy will ever be able to grow substantially inside the EU. He argues that should Italy enter another recession soon, the country would likely use elections to bring in the Five Star Movement — which recently gained Rome’s mayorship — a party which is committed to leaving the EU.
Italy’s economy is so weak that it will eventually end up in a recession, which in turn will trigger political discontent and the rise of populism. That will push Italians to follow the UK and vote to leave the EU, setting off a domino effect across the whole of the continent, and eventually leading to the decline and fall of the European Union.
Italy has a litany of problems with its economy, including lagging productivity growth, sky-high labour costs, relatively low education spending, and a low proportion of skilled workers in the workforce. Coupled with the country’s banking crisis, and it is no wonder that fears about the collapse of Italy’s economy, and the potential that has to send the European dominos tumbling.
Check out the four key charts from Edwards’ research below:
Italy's banking situation is fairly similar to Japan's in the early 1990s. The banking crisis is a symptom of deeper problems, and not a cause.
Italian's are highly antipathetic towards the EU. This means that any big shifts in the country's politics could lead to a referendum on Italy's EU membership. Given that recent data suggest 48% of Italians would vote to leave the EU if a referendum was held, any shift could be hugely important for the country's continued EU membership.
In broad terms at least, unit labour costs show how much output an economy receives relative to wages, or labour cost per unit of output. In times of economic expansion, the higher the unit labour cost, the less output the economy is getting for its money. The more money labour costs the less beneficial it is for the economy. As Europe's most costly labour producer, this is a key problem for Italy.