Italy is the weak link in the Eurozone

Italy sinking deeper into the systemic crisis — financial, economic, demographic and social. Observers noted that Italy is the weakest link of the Eurozone and potentially carries a much greater threat than Greece because of its demographic and economic weight.

Western analysts expect that a serious crisis could erupt in the next two years, especially after Mario Draghi will leave the post of head of the ECB, and monetary policy of the Eurozone will become tougher.

The expert of the American enterprise Institute (AEI) Desmond Lachman believes that the Eurozone will survive a Greek exit, but will not be able to survive in its current form, if the crisis-ridden Italy will default on its debts. The Italian economy — the third largest in the Eurozone, it is about 10 times more Greek. Only the national debt of Italy exceeds $ 2 trillion, and default could bring down not only the European but also the global financial system.

According to the American enterprise Institute, starting in 2008, the economic performance of Italy is continuously deteriorating, the country has experienced three recessions. Over the last 10 years the standard of living of the Italians has declined by about 10%. At the same time, GDP only increased slightly from 1999, when Italy announced the accession in the Euro system, and has even decreased since the financial crisis of 2008. And this is against the backdrop of significant economic recovery in other countries of southern Europe such as Spain, where the government has gone to painful reforms.

The unemployment rate in Italy is 12%, including among young people — almost 40%. The labor market is not reformed, the performance is decreasing. Other factors of stagnation — a crumbling infrastructure and education system that does not meet the requirements of today. In its latest country report the IMF said that Italy will continue to lag behind their partners in the Eurozone if it fails to start the motor of economic growth.

The situation is complicated by the fact that Italy — the “social state”, which is financed by exorbitant costs, constantly increasing taxes and reglamentary the processes of recruitment and layoffs. Business taxation is one of the highest in Europe, the amount of taxes and fees in the country is 61,2%, and in big cities reaches 70%. As a result, small and medium enterprises, which founded the Italian economy unable to invest in production or to expand it. In the rating “doing business” world Bank’s list of 190 countries of the world have placed Italy 50-e a place (for comparison, Austria — 19-m, Spain — 32-m a place). By the beginning of 2017 Italy — one of the major industrial countries have lost the credit rating and received a rating of BBB.

One of the major challenges for the economy was the aging of the population. Italy is one of the world’s lowest levels of birth rate of 1.37 children per woman, while the European average, the figure is 1.6. Unwillingness to have a family and children reflects the uncertainty of the Italians in the future, and the aging of the population leads to the fact that the taxpayers have to support a growing army of pensioners.

Still the Italian government, despite all the promises, failed to implement structural reforms to overcome the crisis. It has not reduced taxes, eased the bureaucratic press, not simplified business rules and continues to increase costs. But the biggest trouble waiting Italy, when the current head of the European Central Bank Mario Draghi will leave in 2019 your post. The Italian Draghi did everything in his power to alleviate the debt burden of his country, he supported the base lending rate at zero. Led by Draghi, the ECB pursued a policy of quantitative easing and in large quantities bought up Italian bonds. The result in Rome was easy to service their debts.

A successor to Draghi, especially if it is the representative of Germany, cheap loans will no longer. But the debts of Italy in March of this year (third in size among the industrialized countries) was 2 trillion 260 billion euros, and they constantly have to re-credit. A rate hike may eventually bring down the financial system of the country. Italian banks have accumulated about 360 billion euros of “bad” securities is about 20% of the loan portfolio. In addition, banks are pushing government debt bonds in the amount of 380 billion Euro. As the national debt, it has increased over the last 10 years from 100% to 133% of GDP.

Along with the errors of the government, the negative impact on the economy have objective factors: the Italian model was not adapted to the globalization of the world markets. A small family business, on which rested the country’s economy was too small to confront the global corporations. Italian “family capitalism” afraid of aggressive foreign investors, and therefore withdraws into himself, lagging modernization of enterprises. In addition, the process of the removal of production abroad, violated the organic industrial relations in the country.


The head of Swiss Bank UBS Axel Weber believes that the salvation of Italy is the main task of the Eurozone. Economic and financial problems of Italy — a much more serious challenge than is commonly believed. The most alarming fact is weak or zero economic growth, not only in Italy but also in most countries of the Eurozone, where also overdue deep structural reforms. Everyone understands that it is necessary to give impetus to the development, but how? Even the economic growth of 1-1,5% not able to solve the fundamental problems of the Eurozone, given the aging of the workforce. As one of the measures Weber offers to stop the mindless buying of debt by the European Central Bank. It will help Eurozone members to proceed to the actual cost-saving measures and reduce unnecessary costs.

In Italy, many believe the single currency the Euro is the cause of all economic troubles. The decision to join the Euro has been criticized in the country from the beginning. However, after joining the hard currency, Italy has clearly overestimated his capabilities, economic growth almost stopped. A weak Lira is allowed to manipulate the exchange rates to remain competitive. In addition, Eurozone rules tie the hands of government, does not allow to increase the deficit and save troubled banks.

This explains the growing criticism of the single currency and the EU as a whole by three of the four major parties in the country — the movement “Five stars”, the “Northern League” and the center-right “Forward, Italy”. Fear only to finally crash the economy and the country’s Constitution prevented to hold a referendum on leaving the Euro. However, in the case of financial collapse, the situation will change dramatically, and then the rejection of the Euro is inevitable. It will shake the entire Euro zone, since European banks holding Italian debt at hundreds of billions of euros.