Italexit

Authors: Ong Guan Da & Harsh Didwania Region Head: (Uday) Sasthaa Gingee Babu

Editor: Sakshi Sanganeria

Abstract

This paper aims to look at the latest political party and movement - Italexit which was formed in June 2020. The paper will be exploring the origins of Italexit, the reason and ideology behind Italexit, and the economic implications that Italexit will have on Italy and the rest of the world if Italexit were to happen.

Illustration by Cham Reikia

1. The birth and roots of Italexit

Before Brexit in the United Kingdom (UK) happened, the concept of Italexit was first introduced by a political party in Italy called Five Star Movement, M5S for short. The movement experienced some success in local elections as they managed to elect 2 mayors in Rome and Turin. Even though M5S was gaining steam, the turnout was relatively low due to the fact that M5S was a relatively new party and their founders were not even politicians (Kenton, 2019).

Italexit came into full force when one of the former members of M5S, Gianluigi Paragone, was expelled and formed a separate political party called Italexit (the formal complete name is No Europe for Italy - Italexit with Paragone) in January 2020. Their main aim is to bring Italy out of the European Union (EU).

With the Covid-19 situation in 2020 and Italy being one of the countries that was most affected by the pandemic, the people of Italy feel that the EU has turned their backs on them when they needed help the most. This results in the citizens strongly favouring the idea of Italexit (Aljazeera, 2020).

This can be backed by a survey that was conducted by Tence in April 2020. They found that 42% of respondents said they would leave the EU compared to 26% in November 2018 (Tunakan, 2020). To add on, another survey conducted by pollster SWG in May 2020 found that 39% of Italians trusted the EU. Another poll conducted by Redfield and Wilton Strategies in July 2020 found that 40% of Italains agree to leaving the EU. This can be attributed to the anti-EU sentiment in Italy (Ferguson, 2020).

2. The two pillars: The need for greater sovereignty and lesser financial contributions

The biggest reason for the increase in popularity for Italexit in recent years can be attributed to the Covid-19 situation.

However, the initial reason as to why Italexit occurred was because of a loss of sovereignty to the EU government in Brussels and high financial contributions to the EU.

In September, 2020, the deputy Prime Ministers Matteo Salvini and Luigi Di Maio declared that they had agreed on a budget deficit of 2.4% of the GDP for 2019. This budget was portrayed as a budget for the people. This decision of the Italian government can be considered to be a “declaration of war” on Brussels. The European Commission can hand down a fine to Italy for breaking the bloc’s rule on the deficit or reject its budget altogether. But this will allow the Italian government to showcase the increased interference of the EU over its member states. The deficit is in line with the bloc’s deficit ceiling of 3% but the second largest debt mountain after Greece, worries the EU over Italy’s public debt which could further increase from 133%. It is said that the EU will exercise severe budgetary control and impose restrictions to solve their budgetary problems while maintaining the stability of the EU. This is looked down upon by the Italian officials and fuels the talks of a possible Italexit.

Moreover, Italians are frustrated with the high financial contributions Italy makes to the EU. Alongside member state contributions, the EU also takes 75% of the customs duties, agricultural duties and sugar levies collected by each member state when goods enter the customs union. (BBC, 2019) On average, Italy contributes about 12% of the EU budget, which is about 0.90% of Italy’s GDP and receives about 0.60% of Italy’s GDP back (Europa, n.d.). Furthermore, after Brexit occurred, it is forecasted that Italy would have to increase the contribution of about 7% to make up for the loss of contribution from the UK (Bresolin, 2017).

Italy has not yet recovered from the 2008 financial crisis as the economy is around below 6% its peak in 2008 and the unemployment rate remains above 11% which is not good for the country. The IMF even projected that the Italian economy will only regain its 2008 output level in 2025 (Lachman, 2016). It is likely that if Italexit were to happen, they would experience an even greater drop in GDP as it is projected that UK’s GDP would be 3.5% lower in 10 years time, it is likely that Italy would experience the same (Islam, 2019).

3. Italexit’s ideology and implications for Italy:

The “Italexit” ideology is that they want to free Italy “from the cage of the EU and the single currency” (Dervey, 2020). It is interesting to explore how it would affect both Italy as well as the rest of the world by drawing comparison to the latest Brexit in predicting certain implications:

The collapse of the Banking Sector: A possible exit and the introduction of a new currency will showcase the direct cost of this decision in the form of changed behaviour of consumers, businesses and institutions. As soon as people realize that the exit from the Eurozone is a distant possibility, they will withdraw their funds from Italy and look for safer and low risk investment channels. This would imply that the cash demand will increase sharply and the Italian banks will face liquidity issues. There is a high probability that the government will impose restrictions on cash withdrawals and overseas transfers. Italians with investment abroad won’t want to repatriate them. This would severely affect the country’s balance sheet and put them under severe pressure. Since the bank owns more than a quarter of the total Italian government’s debt and 11% of the bank’s assets are held in government bonds, they face default risk. This clearly indicates a possible banking failure.

Foreign loans repayment; Foreign creditors would demand repayment of debt in euros while the Italians would want to repay the debt in the new currency. This could lead to prolonged legal disputes to determine repayment terms. This implies that Italy will eventually have to deal with the problem of debt restructuring. Repayment in the new currency would allow the creditors to declare the country to be in default. If Italy wishes to meet its obligation in euros, the debt ratio will explode after a depreciation of the new currency and the country will most certainly default with respect to debt obligations.

Beneficial impact on Exports: Under the new regime, there will be potential trade barriers.The countries exporting to Italy would demand hard currency for payment which would create difficulties in securing imports. The cost of imports and the overall inflation rates in the economy will also increase and this will discourage imports into the country. This will increase competitiveness within the country and allow domestic and local firms to flourish.

4. How the Italexit changes global dynamics

Trading with Italy Italy would have to negotiate trade agreements with the EU and the rest of the world just as how Brexit is carrying out new trade deals. We can observe that most of Italy’s exports comes from manufacturing (Industrial Machinery, Motor Vehicles & Parts, Electrical Machinery) and the top 10 of Italy’s export partners come from the EU (Global Edge, n.d.) .

This can potentially result in a slow down in the world economy as countries in the EU heavily rely on Italy for manufacturing and any delay of the trade agreement will result in the slowing down of growth and recovery of the export partners.

Default risk of Italy As of 2019 (Trading Economic, n.d.), Italy’s government is 134.8% of the country’s GDP, which is about $2.7 trillion. It is also unlikely that the European Central Bank would not be able to offer support to Italy to pay off their debts (Clayton, 2020). This could then lead to a collapse of the eurozone as many countries in the EU are GDP dependent on Italy's economic performance and they are not able to claim back any money from Italy as $2.7 trillion is not a small sum. In comparison, Greece’s debt is around $400 billion and countries in the world are already afraid of what would happen if Greece defaults, the repercussions that if Italy would default will be much greater.

The change in currency will further cause the default risk of Italy to increase (Clayton, 2020). Foreign creditors would demand payments of debts in Euros while Italy would want to repay debts with their new currency. Italy would definitely not be able to meet its obligations and if they were to repay it with their devalued currency, it could cause the debt ratios in Italy to skyrocket and Italy could very well default on their debts.

5. Is an Italexit really on the cards?

Short Answer: No.

Since Italy is expected to receive $240 billion from the EU recovery fund (Harlan, 2020), it is likely that Italy would not be leaving the EU anytime soon. However, depending on the success of Brexit and if more power countries in the EU like Italy and France (based on a poll that states that the people in Italy and France is more willing to leave the EU compared to Germany) decide to leave the EU, it could also create a spark in other countries that already have ideas to leave the EU or have threatened to leave the EU once like Netherlands and Greece. This might spell the doom of the EU.

References

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