EUROZONE CRISIS

IN a continuation of a wave of populist voting following Brexit and the election of Donald Trump, Italy has now followed suit. The ousting and forced resignation of Matteo Renzi, a very successful prime minister in Italy, adds yet more resonance to an EU that is breaking at the seams.

Despite what Marine le Pen, the far-right leader of France’s National Front, would like to portray, Italy’s revolt was not particularly based on an anti-EU stance. The top populist parties in Italy, Five Star and the Northern League, are not opposed to membership of the EU itself but they are averse to the Eurozone.

Nevertheless, it will hardly be seen as a ringing endorsement of the actions of the EU. The issues that have driven this latest referendum result – fears over the waves of refugees from Africa, a desire to rise up against the establishment, and unhappiness over the way the economy has been managed – are the same dissenting signals that we have seen elsewhere.

It is the economic impact that we have most to fear from the Italian result. There is also the issue of what that might mean for the negotiations over Britain’s exit from the EU. The Italian economy is far from healthy, despite marginal improvements in unemployment rates, and the banks remain weak. The country’s debt-to-GDP ratio, at a staggering 133 per cent, is second only to Greece’s in the Eurozone. Despite Italy being the Eurozone’s third largest economy, the country has contracted by around 12 per cent since the financial crisis of 2008.

President Sergio Mattarella will be anxious now to ease fears of instability. But regardless of what action he takes there will be a delay as the markets adjust. In reality, he remains helpless as to what he can do to ease those fears. How long that period of instability lasts is the biggest uncertain factor the markets face. Financial markets do not like uncertainty or instability.

There is a risk that the failure of a major Italian bank, such as the troubled Banca Monte dei Paschi di Siena, could set off a wider crisis. Making the banks strong enough becomes more difficult amid political ambivalence.

That could well provoke another crisis in the euro, at a time when Britain will be in negotiations about its withdrawal from the EU. The fusion of these events is not going to help any new euro crisis or aid Theresa May and her government getting a favourable Brexit deal.

The most telling comment yet has come from the German finance minister Wolfgang Schaeuble, who has said there was no reason for a euro crisis but that Italy urgently needs a functioning government. Startling. Mr Schaeuble infers that a currency crisis was not inevitable. Unfortunately, ending the uncertainty is more than just an Italian problem.