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Concerns about another European Union exit. Three crucial months

22 Dec 2017 13:47|Marcin Lipka

Will we witness another Brexit-type situation? Polls taken at the beginning of March, before the planned elections in Italy, suggest a victory for the Eurosceptic party. This, combined with Italy's cool attitude towards the EU and their weak economic situation, carries the risk of a lively discussion on "Italexit," writes Marcin Lipka, Conotoxia senior analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

The past year posed the question: after Brexit, will the EU will experience another departure? Although no country has joined the United Kingdom as of now, the forthcoming elections in Italy may raise the temperature enough to cause a broad discussion about the disintegration of the eurozone and possibly the European Union itself.

The race for the lowest position side-by-side with Greece

Italy's main problem is a very weak economy. Between 2000 and 2016, its real GDP per capita fell by 5%, according to Eurostat data. At that time, the eurozone grew by 12%, while the whole EU grew by 18%.

It is interesting that Italy's result is even worse than Greece's. It is true that the GDP per capita of Greece also decreased in the analysed period, but was limited in the case of Italy to less than 3%. The lack of economic growth since the beginning of the new millennium is connected with an increase in debt. The relation between debt and GDP rate (for the whole country) has increased from 105% to 132% GDP. In the EU as a whole, only Greece has noted worse results.

Italian ineffectiveness is also very well proven by data from the labour market. The employment rate for people aged 15-64 was 58.1% in Q2 of 2017. This is the lowest result in the EU after Greece (54%), with an average of 67.7%. The leading european countries, Sweden and Germany, scored about 77 and 75%, respectively.

The chances for Italy's fatal economic situation to improve quickly are limited. This is mainly due to the significant backlog in building human capital. The percentage of people who are not in school or doing any vocational training or are unemployed (NEET) amounts to 30.7% in Italy between the ages of 20-34 (last Eurostat data for 2016). This is a worse result than Greece’s (30.5%). The EU average is about 18%, while the results in Sweden and the Netherlands are below 10%. In addition, according to Eurostat, Italians also have the lowest percentage of people with higher education in the EU. Between the ages of 25-54, only 19.4% of Italians graduated from university. It may be surprising that this is not only the worst result in the EU as even Turkey (19.8%) and Macedonia (22.5%) have higher levels.

European scepticism rules

These very weak years in the Italian economy have come at a time of limited faith in the European Union. According to the Eurobarometer in autumn, which is a cyclical survey of climate index conducted by the European Commission, only 29% of Italians surveyed believe that their voice counts in the EU. This is more than in Greece (22%), but less than in the United Kingdom (33%), and the UK is leaving the EU. It should be remembered, however, that Italy was one of the six countries that initially set up the Union (initially coal and steel).

The Eurobarometer data also shows the economic sentiment of Italians and their perception of the Union very clearly. They assess the economic situation of the EU as the worst among all surveyed countries. As many as 58% of Italian respondents believe it is bad at the moment. Even in Greece, this assessment is more optimistic (52%). In Poland, only 19% of respondents believe that the EU’s economy is in bad shape.

Italy's citizens abroad support freedom of labour mobility and learning in the Community (68%). Italians (59%) express the least support for the single currency area among all the eurozone countries. Apart from Greeks, they are also the smallest group out of the 28 countries surveyed by the European Commission that feel that they are actually citizens of the European Union (54%). Even in the UK, which is leaving the Community, this percentage is higher, amounting to 55%. In Poland, it is 77%. However, it is more than 80% in Spain and Portugal, even considering that the recent economic crisis has hit the entire Iberian Peninsula hard. The Eurobarometer surveys may indicate that Italian citizens are mostly explaining their failures through their participation in the Union and not through national negligence.

March's elections are hugely unknown

Italian policy has been lacking stability for a long time. Since the end of the Second World War, the government has changed on about a yearly basis. Usually, however, these were either left-wing or right-wing coalitions. The earliest elections are in less than three months (4th or 11th of March) and may show a completely different picture of Italy.

The Eurosceptic Five Star Movement is currently carrying out surveys with 27-28% support. It has an advantage of about 3-4 percentage points over the Democratic Party, which is currently forming the government. The lead is mostly represented by the Eurosceptic Northern League and the centre-right Forza Italia of Berlusconi with about 15% support.

Although there is a significant risk of Eurosceptics taking control, the market is still quite quiet. This is due to the fact that the head of the Five Star Movement excludes the entrance of the coalition. The Northern League may join the coalition with Forza Italia. In addition, electoral law has recently been changed, which favours the groups with an established position.

It is worth noting that it may be difficult for a divided parliament to form a government at all. The risk of a negative scenario will then increase significantly. The negotiations regarding the creation of a large left-right coalition could take months, and it does not have to last long. The following elections, taking into account Eurostat research, could further strengthen the Eurosceptic sentiment and increase support for the groups holding this position. Currently, there will be enough danger for the markets to start speculations regarding the so-called Italexit.

22 Dec 2017 13:47|Marcin Lipka

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