Political risks on the horizon
In the United States, the constitution and institutions ensure a democratic transfer of power. Boris Johnson will soon be able to claim the success of the United Kingdom’s departure from the European Union. Within the European Union, the political risks are increasing. Not so much because of the Dutch elections or the new leader of the CDU. Even the French elections between Macron and Le Pen in April 2022 are still a long way off. The problem is Italy again. Last Wednesday, Italia Viva – the party of former Prime Minister Matteo Renzi – withdrew from the coalition. The result is political chaos. Now, politics in Italy is always hopeless, but never serious. Yet this new period of political chaos comes at a most unfortunate time.
Pre-Covid growth in per capita income within the eurozone was nowhere as low as in Italy. Between 2000 and 2019, it even contracted. Partly because of this, Italy has the worst housing market in the eurozone since 2008. A falling income and falling house price is an ideal breeding ground for populism. Pre-Covid, Italian unemployment stood at 10 percent versus 7 percent for the entire eurozone and 3.4 percent in Germany. Youth unemployment was still at 28% pre-Covid. The euro is structurally too expensive for Italy. Other countries such as Spain have brought wages down and productivity up, but not Italy. Compared to other countries in the eurozone, the population has relatively low levels of education, only Bulgaria has a smaller proportion of its population connected to the Internet and nowhere in Europe are there as many people over 65 as in Italy. Companies prefer to do business in other European Union countries than in Italy, according to the World Bank survey (Ease of Doing Business); the contrast with Spain is even striking. Italy’s public debt this year will be around 160% of GDP, its budget deficit 8% of GDP. Italy will get money from the European Recovery Fund, about 5% of GDP as a gift and almost another 8% of GDP as a loan. To get that money, Italy, like every country in the eurozone, has to meet certain requirements. Between 2014 and 2020, Italy managed to use only 40% of the allocated funds. This recovery plan will not solve Italy’s problems.
Currently, according to a survey by Tecnè, 67 percent of the Italian population believes that being part of the European Union is bad for Italy. In November 2018, this was still less than half (47 percent). The percentage of Eurosceptics may rise further if the British recover post-Covid quickly, proving all too keen to prove that Brexit is a success. Almost half of Italians want out of the European Union, especially now that the United Kingdom is proving that this is possible. The current political chaos is about the distribution of the funds of the recovery plan. If Renzi and the other parties cannot find a solution, new elections will follow. According to the current polls, the Lega Nord, Forza Italia, and Fratelli d’Italia will then gain a majority. The latter party in particular wants to leave the European Union. The Italian sovereign state must regain its family values, borders, and identity, according to the Fratelli d’Italia. After Brexit, therefore, the Italexit is again in sight. Now, the difference between the Italian ten-year interest rate and the German ten-year interest rate has not been this low in the last ten years, apparently, the stock market does not see things in such a gloomy light or the ECB’s buy-back programme is working wonders. With Italian worries, European worries are also returning, a good argument for foreign investors to be or remain cautious with investments in the eurozone.