On Europe’s Fragile Politics And Italy’s Fragile Banks
I was in Milan last week, giving a talk on Brexit, when news broke that Italy’s biggest bank had lost its chief executive. UniCredit is close to crisis, its share price having plunged 40pc during 2016. The entire Italian banking sector is looking extremely fragile, in fact, with bank share prices down, on average, by a third since the start of the year. You don’t think that matters to the UK? Well, think again.
We’ve heard a lot of blood-curdling statements about “the dangers of Brexit” over recent weeks from the Treasury and the Bank of England, vital institutions which, regrettably, now seem to be entirely politicized. But we hear much less from officialdom about the considerable dangers of staying in the European Union.
One concern looming large in the British public’s consciousness, of course, is immigration, which rose to a net 333,000 last year, including a record 184,000 from the EU. I’m not anti-immigration – not for one moment – but I do believe vast wage differentials across the EU, combined with the more general mass movement of people from Africa and the Middle East to Europe, mean “freedom of movement” is not only naive but increasingly dangerous.
Intra-EU migration is now tearing badly at the social fabric, radicalising European politics at an alarming pace. Anyone who fails to acknowledge this and think through the implications is showing an astonishing lack of awareness.
We’re witnessing the rise and rise of parties such as Sweden’s Social Democrats, the True Finns, AfD in Germany, Beppo Grillo’s Italian Five Star Movement, and Ukip of course, relatively moderate parties, all of which want immigration controls and all of which now command significant support.
If these parties don’t get their way, then more radical, nastier organizations, wielding extreme measures and showing little in the way of tolerance, will come to the fore.
That’s one reason the UK needs to leave the EU, so we can move to a system of controlled, points-based immigration – as in other advanced nations like the US and Australia – that preserves our historic commitment to taking in genuine refugees.
If Britain did that, I suspect there would be enormous political pressure across the continent to modify the Schengen agreement, which has already been suspended in some countries. “Impossible”, I hear my Remain friends say. “The treaties prevent it”.
Well, the same treaties were supposed to enforce the Stability and Growth Pact – remember that? – limiting EU government debt levels to 60pc of GDP. The treaties prevent “bail-outs”. The treaties insist that no country can ever leave the single currency.
All of these apparently non-negotiable rules, these immutable truths, have been exposed as adaptable or downright nonsense, blown out of the water by political realities. The same is true of Schengen, whatever “the treaties” say. In France, the far-Right Front National will likely make it through to the second round of next year’s presidential election.
We’ve just seen the overtly anti-Muslim Freedom Party come within a whisker of capturing Austria’s Presidency. The bien pensants and comfortable political classes can sniff at such developments, dismissing electorates as “stupid” under their breath, but this is democracy.
Unless policy responds, reflecting how increasing numbers of low-paid and economically vulnerable people feel, European politics is going to get much more ugly.
But enough of that for now. Because the Remain danger I want to highlight this week concerns Italy – and, in particular, the country’s economic performance within the single currency and related chances of a banking crisis in the EU’s fourth-biggest economy.
This isn’t “Project Fear”. This is “Project look at the facts, however uncomfortable”. The Italian economy has done extremely badly under the euro, suffering second only to Greece. Italy has grown, on average, by just 0.2pc a year since the single currency was launched in 1999.
Locked in a high-currency strait-jacket, it has lost 30pc in terms of unit labour cost competitiveness against Germany over that period, a loss that would previously have been significantly eased by gradual depreciation of the lira.
The official Italian unemployment rate of 11.4pc, while high (it’s 5.1pc in the UK), is widely dismissed as an under-estimate. In Campania the level is 53pc. In Calabria it’s 65pc. Youth unemployment, having averaged 23pc during the first decade of the euro, is now a heartbreaking 37pc.
That’s one reason why polls show almost 50pc of Italians want to leave the EU, with several mainstream parties openly discussing the prospect of quitting the euro. Italy’s ongoing lack of growth has badly aggravated its debt crisis, with government liabilities standing at €2,170bn, or 134pc of GDP.
The only reason the country’s sovereign bonds aren’t trading at ruinous yields is that the European Central Bank is pumping out €80bn a month of printed money. The most immediate problem, though, one that poses a very real danger of systemic meltdown, is Italy’s banks. UniCredit’s €80bn pile of non-performing loans that did for its CEO is just part of a far bigger NPL mountain – some €360bn across the sector.
Italy’s banks have bad debt on their balance sheets equivalent to around 18pc of all outstanding loans and rising – compared to 3pc and falling in Germany and 4pc in France. While banks’ shares have suffered across the EU this year, those in Italy are down over half as much again as the average.
Belatedly – very belatedly, and under massive diplomatic pressure – Italy is trying to clean up its banking sector. Public confidence isn’t high. Last year, the rescue of four small banks went wrong, and some customers lost their life savings, sparking suicides and national outrage.
With the state close to insolvent, the banks are attempting a private-sector led scheme under which, rather than writing off loans and imposing losses on stock and bondholders, as should happen, weak big banks are propping up weak small banks.
It is, essentially, a face-saving exercise that could very easily go wrong – not least as the ongoing lack of growth with the euro means Italian NPLs and sovereign debts continue to rise as a share of the overall economy. I’ve been astonished at the lack of serious economic debate during this referendum campaign.
Almost every commentator, for instance, accepts without question that sterling will “fall sharply” if there is a Brexit vote, as that’s what the Bank of England says. Really? Why, then, during recent weeks with the polls neck and neck, has sterling risen sharply against the euro, to stand at a four-month high?
Similarly, when it comes to the single currency itself almost everyone now accepts what some of us have been saying for 25 years, namely, that it will only survive if there is a meaningful pooling of a large chunk of euro-wide government revenue and also a banking union. Neither will happen anytime soon.
Both, in fact, are political totems, rather than viable policy outcomes. Ergo, before these massive dilutions of national sovereignty happen – and I submit humbly that they never will – one or more countries will crash out of the euro, causing an almighty mess, the bill for which will be met by the big economies in the EU.
The single currency is a powder-keg. It represents probably the largest systemic danger to global financial markets on earth. Yet, whatever the catalyst, be it an Italian banking collapse or ongoing turmoil in Greece, as an EU member the UK is on the hook should the euro implode.
Consider that when assessing the merits of Remain.
Follow Liam on Twitter @liamhalligan