While last week's news that Italy’s economy had returned to growth in the first quarter of the year will certainly have been welcomed like the proverbial flowers of Spring across the EU, it is, for now at least, little more than a band-aid upon the towering spectre of its massive public debt.
Italian GDP had fallen 0.1% over the third and fourth quarters of 2018, forcing the eurozone’s third largest economy into a technical recession of two straight quarters of shrinking output.
That situation was reversed in the first quarter of 2019, with GDP rising 0.2%, and bolstered by the jobless rate reducing to 10.2% from a previous 10.5%. Small though the turnaround is, it has been welcomed by an Italian government struggling to maintain lids on both its budget deficit and national debt - while still attempting to fulfil campaign pledges to increase welfare spending.
If the postponing of Brexit has allowed the 28 member states a degree of breathing space to focus on the European elections at the end of this month, Italy’s economic outlook has the potential to trigger a potentially far greater financial crisis waiting to happen at the very heart of the EU.
With the country’s sovereign debt of €2.4 trillion significantly bigger than its economy, it represents an economic black hole capable of threatening the financial stability of the country - and, in turn, the future of the euro.
Bearing the label 'the sick man of Europe' for many decades, the Italian Government recently underlined this continued status by cutting its growth forecast for 2019 from 1% to 0.2%. S&P Global Ratings predicted Italy’s economy will "stagnate" this year - a forecast agreed by the country’s primary business lobby, Confindustria, which expects the economy to remain "fragile and uncertain" in the second quarter.
While Italy's public debt has reversed its downward trend to grow 1% in 2018, reaching 132.2% of GDP, it remains the highest in the EU - and seems destined to increase further, given the limited growth forecast for the rest of 2019.
Despite its status as the eighth-largest economy in the world, Italy’s economic problems have festered through a variety of issues going back to the 1970s. Despite having some of the world’s most admired brands - Armani, Versace, Ferrari and Olivetti, to name but a few - the country continues to endure a complex tax code, frequently cited as responsible for discouraging entrepreneurial activity. Allied to this is the triumvirate of Byzantine regulation, inefficient public administration and notoriously restrictive labour laws - all of which contribute to sluggish growth and weak productivity.
The spat between Brussels and Rome over the Italian Government’s 2019 budget toward the end of last year was another salvo of discontent that may be magnified further following the upcoming EU elections.
While the financial crisis endured by Greece eventually required €320bn in EU loans to stabilise its economy, the Italian scenario is potentially far greater. Because Italy is one of the big three economies underpinning the eurozone, the scale of any triggered crisis would be enormous - and much more difficult to contain.
With its debt burden too big even for an ECB bailout, it is, as one observer put it "too big to fail, but also too big to save."
Given that the Brexit dilemma has been temporarily moved to the back pages, Europe may now have to grapple with an 'Italexit' - a very different, and more dangerous prospect for Frankfurt and Brussels to contemplate.