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The Italy Question: to Exit or not to Exit?

The Italy Question: to Exit or not to Exit?

(Featured image: express.co.uk)

The European Union (EU) participates as one unit in the global economy, operating under the Euro as its unifying currency. The EU was formed after the World War II to encourage a barrier-free trade zone, establish a more efficient marketplace, and build economic wealth. Until now, it has been successful in maintaining a competitive value with the US dollar at the rate of 1 € to 1.13 USD. However, in the aftermath of Brexit and Donald Trump’s victory, the future of European Union is looking alarmingly shaky.

With agitation growing amongst the Europeans due to unaddressed refugee crises and continued economic stagnation, it is possible to see a demise of the EU owing to some countries’ specific situations and their respective extremist party’s values. Throughout Europe, radical political parties have supported the thought of leaving the European Union, often citing the EU’s limits on state sovereignty as their impetus for leaving. This however, may veil their real reason for leaving, namely because of issues such as immigration, healthcare, or economic failure.

Arguably, one of the countries, that could stand to benefit from exiting the European Union is Italy. Although Italy has not been a major contributor to the power of the European Union, it significantly supported the EU economically. Italian exports are currently unmatched across the global market of luxury goods due to their meticulously high manufacturing and local labour costs. However, since the 2008 Great Recession, Italy has experienced a shortfall in growth of merchandise exports. Moreover, the falling value of the Euro essentially makes Italy’s exports cheaper across the global market. Although it may increase the demand for the country’s goods, it does not satisfy the high labour and manufacturing costs.

An Italian luxury sports car by Lamborghini (Photo: 95octane.com).

The Italian economy suffers from a high current account deficit which requires a constant foreign capital inflow in order to pay debts. Amidst Donald Trump’s apparent defence policy of making Europe pay its share of NATO military expenditures, we can anticipate an increase in the country’s economic deficit. NATO is an intergovernmental military alliance between 28 countries that pledge to defend each other in case of an attack. One of the clauses to join this alliance is to keep the country’s defense budget equal to or greater than 2%.

Economically speaking, a country manages its economy through two main components: fiscal policies and monetary policies. These two economic levers deal with juggling the value of the currency and controlling the rates of interest set mainly by countries’ respective reserve banks. However, the individual countries’ ability to adjust these economic levers is inhibited by the European Union. The small economies in the EU cannot control the value of the currency (€) and are left at the mercy of the strongest  economic powers, in this case, Germany (after Brexit). Some countries end up accepting this economic hierarchy in exchange for easier access to loans. Since the wealthy Germans back Italian loans, there is a tendency among Italians to inflate the value of the Italian Lira (which backs all national currency) with respect to the Euro. This allows them to enjoy a high standard of living both inside and outside of Italy.

This leads to a situation called ‘Easy Money’ which, along with a lack of State control, has greatly affected the Italian economy. In 2016, Italy’s GDP growth wasn’t even close to 1%. The Debt to GDP ratio is at a staggering 132%, and Italian manufacturing is barely close to India’s or China’s for that matter. The overall unemployment is 12% and rising, with 36% of the youth unemployed. Agricultural subsidies, uncontrolled welfare, and other similarly inflated expenditures have wreaked havoc on Italy’s budget, resulting in more and more loans, which, in turn, only generate more loans.

Considering the above, it isn’t surprising that Italian standard of living hasn’t risen since 2000. According to the IMF, Italy’s economy is not expected to get back to the pre-Lehman crisis level of 2008 until 2025.

In addition to monetary issues, Italy also faces a huge refugee crisis. As of October 2016, more than 150,000 refugees had arrived from Pakistan, Afghanistan and North Africa. Overtaking Greece as the main point of entry for refugees, Italy has witnessed entire communities, many of which are from Syria, cross its border. Though we haven’t seen any serious reports of terrorist attacks in Italy, we can’t be certain that we never will. Taking into account such drastic situations, support for new, active political parties in Italy is increasing. One such example is the steep increase in the support for the Five Star Movement. The Five Star Movement was founded in 2009 by comedian Beppe Grillo and web strategist Gianroberto Casaleggio and is supposed to be based on, ‘the twin ideas of a new form of direct democracy and popular disgust with the political elites’. It was last in the headlines for its notorious and successful attempt to oppose Prime Minister Matteo Renzi’s constitutional reforms, which  led to Renzi’s resignation. With this defeat of Renzi, quashing the referendum that mediated relations between Italy and EU, Italy’s exit from the European Union, may not be far behind.

The Italian Coast Guard helps Syrian refugees get to shore (Photo: mintpressnews.com)

Would Italy benefit from the exit? Here’s my prima facie skepticism. ‘Itexit’ would be bliss in escaping the wrath of the Islamic terrorists running amok in the EU. However, as mentioned above, Italy may not come out well when assessing their monetary position. Italian banks have over 360 billion Euros in non-performing loans, which means that if they exit the European Union, not only would they end up devaluing their currency but they would also risk losing stability of the common currency. Moreover, if the Italians proceed to swell their welfare in a subsidy-filled economy and don’t consider basic labour jobs, it could further cripple the country’s economy.

Looking at the global scenario: people are quite aware of the shaky Chinese economy. Approaching the end of its most recent eight-year business cycle, which began following the Great Recession, China has started outsourcing its electronic market to India, and continues to struggle in maintaining investor confidence. However, its massive manufacturing economy can afford to sustain these shocks, especially as it deals with a saturated labour market. In the Italian case, economic mismanagement may result in greater loss of global business confidence – something the country’s shaky finances will not welcome. Having said that, Itexit remains merely a prediction based on political protests and extremist trends. Whether it would benefit or harm Italians can only be seen if and when it happens.


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