Italy: the eurozone’s next big test?

While the UK provided an election upset last week, the results earlier this year in the Netherlands and France saw extreme parties denied power. Nor do the markets fear an upset when Germans go to the polls this September, says economic commentator Roger Bootle.

Bootle is the founder and chairman of research group Capital Economics and regular economic pundit in the British press, whose most recent book is titled ‘The Trouble with Europe’. He was also chosen as a keynote speaker by software and IT giant SAP Ariba for this year’s European SAP Ariba Live event, held earlier this week in the Czeech Republic’s capital of Prague.

His presentation, ‘Europe at an Inflection Point: Threats and Opportunities’, had to be hastily rewritten in the wake of last week’s surprise result, which saw UK prime minister Teresa May’s ruling Conservative party fail to achieve outright victory despite predictions of a landslide. Bootle confessed that he had been surprised by the outcome and confessed that is “crystal ball had got a bit cloudy”.

Bootle stated that after several years of crisis, the eurozone was staging a “fairly decent” economic recovery so far in 2017, with former casualties Ireland and Spain recovering strongly and even Greece and Italy expecting some growth this year.

With the zone’s key economies of Germany and France accelerating from modest to stronger growth, by 2019 the European Central Bank (ECB) is likely to feel ready to start raising interest rates.

This is despite the gap between the EU’s economic leaders and its stragglers remaining wide. Gross domestic product (GDP) for Spain has only just returned to the pre-crisis level of 2008 and both Italy and Portugal have still to reach that level. Greece’s fall has been “calamitous”, with GDP 27% below that of less than a decade ago.

The test ahead

However, Bootle believes that the eurozone’s future rests largely on developments in Italy, which is due to hold a general election before next May. While the country’s ruling centre left Democratic Party is pro-European Union (EU) it is challenged by comedian Beppe Grillo’s Five Star Movement, which is fiercely anti-EU. While they trail behind in the polls, so are Italy’s other two main parties, the Forza Italia and the Liga Italia.

“So three of Italy’s main four parties are euro-sceptics and put Italy’s ills down to the single currency,” noted Bootle. “This makes a political upset within the next year highly likely.”

What’s more, a Eurobarometer of voter sentiment across member states conducted in April polled members of the public on whether they felt their country’s membership of the EU was a good thing or a bad thing. As might be anticipated sentiment was negative in both Greece and Italy, but also showed antipathy towards the EU among Austrian voters.

While the UK showed opinion split fairly evenly – in line with last June’s referendum result – sentiment was only slightly more positive in France, where a sizeable minority would like the country to follow the UK in exiting, despite the far right Marine Le Pen losing to Emmanuel Macron in the presidential election.

So an election upset in Italy could yet set off renewed tremors across the eurozone, said Bootle. Meanwhile, a further UK election is distinctly likely and the pound is likely to remain fragile. “May can probably sustain her government for a while, but the Democratic Unionist Party (DUP) and Scottish Conservatives are likely to exact a high price for their support. Her position is extremely fragile.”

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Mark Carney Bank of England

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