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The European Union at present is undoubtedly at a crossroads. The economies which were once reckoned as strong pillars of the EU are now on the verge of an erosion. Economists had given several warnings on the soaring debt issues in many EU economies following the financial crisis in 2008. The EU's nightmare began with the economic breakdown of Greece in 2015. Although Merkel’s Machiavellian plan of austerity measures avoided the impending Grexit, they couldn’t do anything to hinder the inevitable Brexit.

One after another, threads are being knitted to this thriller, making the screenplay more complex to handle for the directors in Brussels. The country which is going to get featured next is none other than Italy. The third largest economy in the Eurozone is now a sinking ship. Latest statistics reveals that the current debt of Italy is around 130 percent of the total GDP which is nearly 2.6 trillion dollars, almost same as the size of the Indian economy in nominal GDP terms. The Italian economy is 10 times bigger than that of Greece, further alluding the intensity of this economic crisis. John Higgins and Adam Hoyes, economists at Capital Economics mentioned in a research note that "Unlike Italy's, Greece's debt-to-GDP ratio is on a downward trajectory and its debt has been restructured under far more favorable terms than Italy's. What's more, Italy's debt is much larger in absolute terms and poses a much bigger systemic risk for the euro-zone as a whole”.

Looking at the long term growth prospects, the statistics show a shocking result that Italy’s GDP per capita remains stagnant at the same level as 18 years ago.

Source: OECD

The Italian banks are already financially weak, scuffling with refinancing their bond issues and huge debts. This has reduced their capacity to lend funds required to rejuvenate the flailing private sector in the country. Given the size of the Italian economy, to what extent the European Central Bank could intervene financially to help them recover is also doubtful. The economic issues in Italy have already posed major threats to the monetary targets of the European Central Bank. The crisis in Italy, if not contained, would shatter the market confidence in the entire Eurozone, putting the EU in big trouble.

Whom Should We Blame?

Undoubtedly, the political scenario in Italy made the crisis worse. The radical measures of the new populist government in Italy is threatening the autonomy of the Italian central bank, Banca d'Italia. The new government wants to take control of the sizeable gold reserves of the Italian Central Bank. “The gold is the property of the Italian people, not of anyone else,” said Matteo Salvini, the deputy prime minister and the leader of the League Party making clear what the government is up to — namely, devaluation. This was followed by the removal of the leadership of the Central Bank on the pretext of preventing a banking crisis in the country.

In 2018, the Italian government sought to raise its budget deficit blindly to 2.4 percent for the next three years. However, this proposal was not acceptable to the EU. The conflicts of interest between the government and the EU became visible from there. With a common currency in use, it is impossible for the Italian economists to think of a devaluation and might be now regretting their decision to switch from Lira to Euro. Nevertheless, it is not a good choice to go back to Lira at this moment as it would cause massive losses to the investors in whole Europe resulting in an unprecedented global economic crisis.

This instability persisting in the Euro Zone shows the failure of employing a common fiscal and monetary policy hand in hand which also questions the rationale of the concept of an Economic Union. In fact, the best performing economies are also threatened by the preposterous political and economic decisions taken by the leaders in the member countries.

The Italian crisis now posits a serious threat to the existence of the whole Euro Zone. Reconciling the ambitious Italian government to stay in line with the EU policies is a tussle which we are about to witness in the near future. However, the Italian economic crisis is just the tip of an iceberg. The debt issues in other European economies including Portugal and Spain are also serious matters of concern. “The fundamentals in many European countries are still relatively weak. Spain is still running an excessive deficit, as is France” said Michael Leithead, head of fixed income at EFG Asset Management. Mario Draghi, the European Central Bank President mentioned in 2012 that the European Central Bank will do ”Whatever it takes” to save the Euro. It is a matter of time to see what it will cost for the EU to put a stop to this rapidly growing debt contagion.