Uncertainty over Italian finances threat to eurozone stability

Uncertainty over Italian finances threat to eurozone stability

THE HAGUE, June 1 (Xinhua) — The renewed effort by Italy’s two anti-establishment parties to form a government removes the risk of further turmoil in financial markets.

However, experts such as Adriaan Schout, senior research fellow at Clingendael, the Dutch institute for international relations, fear that unless the eurozone’s third biggest economy reforms, it will undermine the stability of the euro area and put on hold the discussion for further European integration.

“Italy has made insufficient efforts to address its economy’s fundamental problems, including corruption and nonperforming loans, but most notably to lower its high debt and implement the reforms this requires. Most probably Italy will keep functioning within this relative stability, avoiding upsetting the markets, but remaining problematic, undermining the credibility of the eurozone,” he said.

Italy’s two anti-establishment populist parties, the Five Star Movement and the League, revived their coalition plans on Thursday and “reached an agreement on a political government headed by Giuseppe Conte as prime minister”, according to a joint statement issued by the two party leaders, Luigi Di Maio and Matteo Salvini.

The agreement removed the risk of snap elections, a prospect which fuelled a big sell off in Italian financial markets, engulfing broader European markets and the euro during the week. Investors believed that the prospect of new elections would lead to a stronger mandate for euro-skeptic politicians, questioning the country’s future in the euro zone.

But political expert Schout ruled out the possibility of Italy exiting the euro. “This is a possibility, but I don’t see it happening at this stage.”

Among members of the new Italian government, expected to be sworn in on Friday, is economist Paolo Savona, who had devised a plan for Italy’s departure from the euro zone.

“This is a not a majority of the political system that wants to leave the euro,” Schout said. Recently, the Five Star Movement and the League leaders erased the possibility of exiting the eurozone, which was foreseen in their initial agreement, formed during their first effort to form a government last week.

Savona’s appointment as finance minister in the first effort by the two Euro-skeptic parties to form a government was vetoed by Italian President Sergio Mattarella. Savona, who moved to the position of minister for the relations with the EU, has denied that the new government would seek to exit the euro.

According to Schout, in case Italy “remains consistently problematic and notoriously unreliable”, the situation will further undermine the EU’s credibility and stability, while putting discussions to reform the eurozone on hold.

“It will put the reform discussions, which are already difficult, in a different perspective,” he said, referring to plans by French President Emmanuel Macron to further deepening the eurozone. Germany has voiced cautious support for Macron’s ambitions, while eight northern European countries, including the Netherlands have rejected key aspects of his plan.

The Dutch political analyst and expert on European issues warned the European Commission, the EU’s executive arm, and the European Central Bank (ECB) should put pressure on Italy to reform and comply with the eurozone fiscal rules.

“If Italy is allowed to keep on kicking the can down the road, it will be bad for mutual trust within the EU, bad for the reputation of the EU institutions, and bad for the eurozone.”

The commission proposed earlier this week to increase EU funding for Italy’s poorest regions in the next EU long-term budget for 2021-2027.

In addition in its report on Italy, issued May 22, the EU executive said the previous government fulfilled the EU’s fiscal rules, as it met the agreed path to reducing sovereign debt, but Commission Vice President for the Euro Valdis Dombrovskis said “Italy needs to continue reducing its public debt”.

The Five Star Movement and the League leaders have warned that they would not respect the EU’s fiscal rules, while their agreement includes promises of increasing expenditure, reducing taxes, renegotiating EU treaties and cracking down on immigration.

Against this uncertainty, Schout suggested a strong reaction by the financial markets sending a clear message to Italy of the need to reform and lower its sovereign debt might have been worth paying the price for some turmoil on the financial markets in the meantime.

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