Italy Could Bring the Euro to Its Knees

The European Union has faced numerous challenges over the last decade. The financial crisis in Greece has been expensive, requiring substantial loans and concessions in an effort to stabilize that nation’s economy. Unemployment rates in countries such as Spain have topped 25 percent, growth is stagnant and many member nations are dealing with a rapidly aging population. The United Kingdom’s vote to leave the European Union triggered a wave of uncertainty among investors that led to a decline in the value of the euro although the British pound also fell in value. However, although issues in a number of countries have challenged the European Union, it may well be Italy that brings the euro to its knees.

Why Italy Could Spell Doom for the Euro

Italy is a nation in economic crisis. Following the global crisis of 2008, Italy made modest gains in the restructuring of its banking system and stimulating economic growth. However, permanent fixes have not been implemented, and regulations contained in the European Union contract make it difficult for Italy to address some of its most pressing problems. As Ambrose Evans-Pritchard opines in The Telegraph, Italy may be forced to choose between its economic survival and the euro.

Should Italy abandon the euro and return to its former currency, the repercussions could be substantial. Despite its woes, Italy still has the third-largest economy in the European Union, according to David Stockman’s Contra Corner. Stockman also states that if Italy moves away from the euro, it could deal a fatal blow to the euro and possibly to the European Union itself.

Italy’s Banks Could Make Abandoning the Euro the Only Viable Option

Italy’s economic problems are complex, and there is no single industry or cause that can be blamed for the nation’s issues. However, many analysts feel that Italy’s banking system is the underlying cause of most of the nation’s economic woes.

Italy’s banks hold nonperforming loans totaling approximately 200 billion euros, according to MarketWatch.com, equivalent to about 8 percent of all loans. Some analysts believe that the value of nonperforming loans will soon increase by 160 billion euros, pushing the ratio to 15 percent. Banca Monte del Paschi alone held almost 47 billion euros worth of nonperforming loans in 2015 and has been asked by the European Central Bank to reduce that amount to less than 15 billion euros by 2018.

Since nonperforming loans are those on which the borrower is significantly behind on payments, the chances are that these loans will never be fully repaid. Under European Union rules, however, the Italian government cannot just bail out the banks; bondholders must bear at least part of the loss. This places Italy’s elected officials in a dilemma. Whether bondholders or taxpayers bear the cost, there will be a political backlash.

Italy Faces Many Economic Challenges

The problems with the country’s banking system are significant, but other issues are undermining the Italian people’s confidence in the euro. Italy has public debts that exceed 130 percent of the nation’s GDP; among European nations, only Greece has a worse debt-to-GDP ratio. Italy’s economy is stagnant, with growth expected to hover around 1 percent annually. Despite these challenges, however, the European Union Fiscal Compact requires Italy to generate budget surpluses sufficient to reduce the debt-to-GDP ratio by 3.6 percent annually for 20 years.

The Italian People Blame the Euro for Economic Woes

Unemployment, stagnant growth and a lack of confidence in the nation’s banking system have generated considerable political unrest in Italy. Many people blame the euro for the country’s economic issues. Matteo Salvini, a rising political star, has been quoted as calling the euro “a crime against humanity,” and his view seems to be echoed by a large number of the Italian people. A recent poll shows that 48 percent of the respondents favor abandoning not only the euro but the European Union as well.

The mood of the citizens is also reflected by the growing popularity of the Five Star Movement, which is commonly called M5S. M5S has become the most popular political party in Italy, winning 19 out of 20 mayoral races in June 2016. M5S is calling for a referendum on whether to restore the Italian lira or retain the euro. This option is not supported by the opposing party. Instead, Prime Minister Matteo Renzi is asking for a referendum on reforming the constitution as a means of dealing with the nation’s issues. A poll conducted on July 1 found that only 28.9 percent were in favor of Renzi’s plan; 34 percent opposed it. Only time will tell which plan the Italian people will ultimately decide to support.

Why Italy’s Economic Situation Matters

In the modern world, no nation is an island. Economies have become intricately intertwined through trade, investments, loans and politics. Whether it is the UK’s departure from the European Union, Greece’s financial collapse or Italy’s abandonment of the euro, events in foreign countries can have a significant global impact. If you would like to learn more about the economic situation in other nations, including Italy’s movement to abandon the euro, visit PersonalMoneyStore.com.

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