During World War Two, Winston Churchill became convinced that Italy would turn out to be the weak point of occupied Europe, and so it proved in 1943.
Could history be about to repeat itself albeit in a very different context?
The land of ‘La bella figura’ has emerged as one of the main victims of globalisation resulting in the mass closures of many of the small manufacturing enterprises that formed the basis for a long period of prosperity in the post-War years.
As the EU struggles to adapt to the recent British referendum vote, Italy has once again emerged as a source of real concern in the minds of supporters of the Union.
Could this land with its great spine of mountains turn out to be Europe’s latest financial Achilles heel?
The country’s public debt stands at around 135% of GDP well ahead of any other major OECD economy, with the striking exception of Japan. Italian output remains below levels of 2008, while youth unemployment remains in excess of 36%, having peaked at more than 40%.
Growth is sluggish, with the economy expected to expand by barely 1%, this year.
Many believe that this is a society in deep crisis, but the real spark could be provided by its troubled banking sector.
Non-performing loans have reached €360bn and there could be worse to follow.
The chairman of France’s second largest bank Societe Generale, Lorenzo Bini Smaghi, raised eyebrows the other day when he suggested that troubles in the country’s banking system could spark a Europe-wide financial crisis.
Mr Bini Smaghi was a member of the board of the ECB at the height of the financial crisis, attracting controversy in Ireland over his hardline attitude to Irish requests for a debt restructuring.
Now, the boot may be on the other foot, with the interest rate on Italian sovereign benchmark debt edging up past, the admittedly low, 1.5% level.
Mr Bini Smaghi has warned that we could be at the beginning of another period of contagion, although he insists that Europe’s central banks are on the case, this time round, by pouring liquidity into the market.
The ratings firm Moody’s has weighed into the debate, arguing that a “small crisis” like that in Italy could trigger a chain of events that threatens the stability of the EU.
Across Europe, since the Brexit vote, bank shares have dropped by more than 20%, but in Italy, there has been a 35% decline, with a 40% drop posted in the shares of the country’s biggest bank UniCredit.
Indeed, Italian bank shares have more than halved since April.
In truth, Italy’s financial sector is messier and more fragmented than a toddler’s half-eaten plate of spaghetti.
There are more than 500 banks in a country which has more bank branches per head than in any other developed economy.
The country is highly conservative. Local ties and customs predominate.
The history of the country’s financial sector is certainly gilded.
Italy is credited with providing the world with the word ‘bank’: It is said that late medieval merchants, many of them Jewish, first traded with each other on benches known as ‘banca’, lending to farmers whose land and produce served as security for those loans.
Across northern and central Italy, institutions arose to cater for the new class of Renaissance era merchants. Tangible traces of their profitable existence survive in architectural form across cities such as Florence.
By some measures, the proportion of non-performing loans across the banking sector sector in Italy has reached 18% of all lending. This is three times the level of problem loans in American banks at the height of the financial crisis.
A fundamental restructuring of the sector will be required along with a major recapitalisation. This will be highly problematic for the centre left government led by 40-year-old Matteo Renzi whose popularity has been in free fall in recent months.
New EU ‘bail in’ rules are now in place which require that bondholders and also depositors assume 80% of a bank’s liabilities before any government funds can be used.
The problem in Italy is that many bondholders are ordinary savers and not institutions. ‘’Burning bondholders’ has an altogether different meaning in the Italian context.
Recently, one such bondholder, a retired man, committed suicide after he lost €110,000 on bank bonds he had invested in. That generated a national outcry.
Prime minister Renzi has begun tackling the problem by establishing a new state-run fund for struggling banks called ‘Atlante’ — the fund is backed by larger, wealthier banks.
This has raised concerns that it is essentially anti-competitive and in truth, a sticking plaster designed to tide Mr Renzi over a referendum on the constitution due in the autumn.
The prime minister has stated that if he loses the referendum proposals on legislative reform he will step down (shades of David Cameron here.) With him, would go another pillar of stability in the EU edifice.
Certainly, the political environment is changing rapidly. A poll by Demos has revealed that the populist Five Star Movement, established by comedian Beppe Grillo, would win a parliamentary majority if a general election was held in the near future.
Five Star candidates have just been elected as mayors of Rome and Turin. The movement had been opposed to the EU, though its new leaders appear to have shifted their stance towards a more reformist approach.
They are now pressing for deep-seated reforms of European institutions. They are also aiming to shake up their somnolent country.
The hope is that this new wave of reformists could prove more genuine than the ersatz crew of Forza Italia MPs under the self- aggrandising Silvio Berlusconi.
The country really is at a crossroads. Almost half the electorate has turned against the EU, a convenient whipping boy for many. The country’s legal system is in gridlock and now its once impregnable banks are shaking to their foundations.
The government really needs to fund a large bailout of the sector, but it is being hobbled in this aim by EU state aid rules.
The idea that depositors and bondholders should be ‘bailed in’, Cyprus style, is nothing short of dynamite with a short fuse attached.
The big question is whether Angela Merkel and the Germans will allow the Renzi government more latitude, here, in the wider interest of stability.
Does Ms Merkel have the political credit, or imagination, to override the apostles of austerity in her ranks?
Italy, one of the original six member states has long combined stated devotion to European principles with a canny disregard for the rules laid down in Brussels and at the Council of Ministers. But this strategy is clearly wearing thin.
If the Italians do not get their act together could this indeed turn out to be the place in which the real unravelling of the EU, as we have known it, begins ?
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