Italy is the next domino to fall

Whilst it may seem too early to predict the impact of the Italian referendum, it is likely the domino effect emerging in Europe will continue in Italy.

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Nigel Farage recently declared that there will be a ‘domino effect’ throughout the European Union, whereby he will assist other countries to win their independence from the EU superstate. But Italy, the next domino to fall, is collapsing with no help from the former UKIP leader.

Some of the consequences of the Italian referendum on the government’s proposed constitutional reforms designed to curb the powers of the Senate last Sunday are already apparent. Though Matteo Renzi declared his resignation in the wake of defeat, Sergio Mattarella, the President of Italy, has persuaded him to remain as Prime Minister until the 2017 budget has been ratified in the second chamber.

Though Angela Merkal reacted calmly to the result and promised to collaborate with the new government, this did not prevent the euro from dropping to a 20 month low, despite rebounding later. Nonetheless, the consequences could be more severe than that. Italy’s economy is 12 per cent smaller than it was during the beginning of the 2008 Recession. Italy’s banks need radical reforms that will prevent their debt-to-GDP ratio from crippling the country’s chances of recovering from economic turmoil, which currently stands at 133 per cent.

The Five Star Movement and the Northern League are demanding urgent elections to deliver a new government in the wake of Renzi’s delayed resignation. But despite their best intentions of establishing a new administration, the uncertainty surrounding Italy’s future may well hinder economic recovery regardless. Banca Monte dei Paschi di Siena, one of the country’s major banks, is on the verge of failing. This could become inevitable following a lack of clarity surrounding the outcome of anticipated elections.

However, let’s not forget what these populist movements intend to achieve. They want to drag Italy out of the eurozone, thereby destroying any hopes of a unified currency surviving. In a world where Brexit and Trump have both become distinct realities, this is possible given the country’s governments are elected by proportional representation (i.e. the number of votes a party wins determines the collection of seats they then hold). This makes it easier for these parties to win and achieve their ambitious aims. We do not know when, or if, elections could be held, but it is likely mainstream parties will face a pasting in a country whereby their economy has stagnated.

If the banks run out of money as a result of political upheaval caused by a likely victory for the alternative parties, it is probable Italy will be forced to exit the eurozone. Whilst this will not murder the European project entirely, it will shatter the euro’s chances of survival. The effects this will have on Europe’s economy will be so adverse that, assuming the EU is capable of producing a single rational decision, they will want to prevent further turmoil. This could mean they may want to prevent Brexit from derailing economic recovery and therefore provide us with a deal that satisfies both theirs’ and Britain’s best interests. No doubt Theresa May is secretly delighted at the Italian result because it will enable her to demand a sensible economic deal with her European counterparts.

But the combined outcome of a ‘sensible’ Brexit and Italy’s withdrawal from the euro is not worth underestimating. 2017 will prove that there is a domino effect emerging at a European level. We do not know what impact this will have on upcoming French, Dutch and German elections. This could cause further demands for referendums and withdrawals from the eurozone, which will also destablise the single currency and cause the EU to collapse altogether. And it seems the more resistance there is to European unity, the more the EU suggests further integration is the answer. This is shown by their open declarations to create an EU Army, which will add flames to the burning European dream. Like when the Soviet Union collapsed in the early 90s, it is likely the EU may end in a similar fashion.

Italy is the next domino to fall. Whilst these are only possibilities as we speak, anything can happen these days. Keep a close eye on this country because the effects of this referendum defeat, which, ironically, was an expression of support for the status quo, have wider ramifications for a European project on the verge of failing.

 

 

1 COMMENT

  1. The Eu is like the Titanic mortally wounded and drifting in a heavy swell countries like Italy Greece and Spain are are getting ready for the final kill

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