“On 5 December, Europe could wake up to an immediate threat of disintegration,” says the FT’s Wolfgang Munchau. Matteo Renzi, the centre-left prime minister, has called a constitutional referendum on whether to reduce the size and influence of the country’s upper house, the Senate. Renzi has said he will resign if the measures are rejected, which polls have suggested they will be.
This could lead to new elections and a possible majority for the populists of the Five Star Movement, who have pledged to hold a plebiscite on leaving the single currency. Italy’s exit “would bring about the biggest default in history”, says Munchau. Foreign holders of Italian bonds would be paid in the new, hugely devalued currency, and many continental banks would lose so much money they would immediately go broke.
At present, the Senate is just as powerful as the lower house, and “laws can bounce back and forth between the two for decades”, as The Economist points out. The hope is that the measures could reduce legislative gridlock, and make it easier to pass structural reforms to galvanise the seemingly moribund economy.
Since 1999, when the euro was established, the UK has grown by 40%, says Roger Bootle of Capital Economics in The Daily Telegraph. Italy has expanded by less than 6%. The stagnation is both reflected in, and reinforced by, a creaking banking system in which around 20% of loans have gone bad.
Banks are loath to write them off because the system would become insolvent, but with these loans clogging up the balance sheet, new capital is not reaching promising new companies. Meanwhile, the labour market remains inflexible and several sectors of the economy are bogged down in petty rules that thwart competition and growth.
In the past, Italy used to be able to gain breathing space by letting its currency depreciate. Now that it’s part of the single currency, it can’t. Italy’s overall debt pile has reached 130% of GDP, despite recent austerity measures, and it won’t be able to start reducing this unsustainable load without growth. If it exits the euro, a jump in competitiveness from a lower exchange rate should boost growth and “in such an environment, it might be easier to get through the reforms”, says Bootle. Many voters, in short, would be tempted to leave the eurozone in the event of a vote.
If voters decide to give Renzi a kicking, his government might not fall straight away. The next elections are only due in 2018, and parliament could well cobble together a new government. But if this “turns out to be a recipe for continued growth-sapping inaction and indulgence of vested interests”, says Simon Nixon in The Times, “it could fuel support for populists”. This is also a danger if Renzi prevails. Italy’s exit from the euro appears to be a case of when, not if.
South Africa heads for “junk” status
South Africa’s shaky economy and a spat between President Jacob Zuma and his finance minister Pravin Gordhan are threatening the country’s credit rating. Standard & Poor’s (S&P) says it may decide to relegate it to non-investment grade – “junk” – status, putting its debt on a par with Russia’s.
Foreign investors have been rattled by Zuma’s attempts to remove Gordhan and increase public spending. Cronyism and delays in tackling the inflexible labour market have also hurt confidence. A downgrade needn’t trigger a market panic, says George Hay on BreakingViews.com. It would only apply to South Africa’s foreign-currency debt, not local-currency paper, which accounts for most of the state’s borrowings.
However, it could backfire if Zuma uses the move as an excuse to insist that South Africa needs a change of finance minister, and then “appoints a stooge” who will scare the markets and deter foreign capital. If S&P stays its hand for now, “Gordhan would gain some breathing space”.