With Italian banks in the cross hairs, could the Eurozone crisis be about to return?

Statues of vestals are displayed at the
Italy's economy is crumbling: Could it lead to a Eurozone break-up? (Source: Getty)

Ben May, senior Eurozone economist at Oxford Economics, says Yes.

During the Eurozone crisis, the Italian economy largely remained on the sidelines of the troubles. But this also meant that Italy failed to restructure its banks and make the painful structural reforms essential for long-term survival in the Eurozone. Added to that, it appears increasingly likely that the government will lose October’s constitutional reform referendum, triggering new elections and possibly a new government headed by the populist Eurosceptic Five Star Movement. Confindustria (the Italian employers’ federation) has predicted that this could plunge Italy back into recession, which would add to the banks’ huge piles of non-performing loans and push government debt ever closer to unsustainable levels. While the Eurozone’s crisis management tools have been strengthened over time, the region is ill-equipped to support an economy that is over nine times larger than Greece’s and able to wreak havoc on the Eurozone economy and financial markets just by threatening to leave the currency bloc. Italy is a ticking time bomb.

Danae Kyriakopoulou, managing economist at the Centre for Economics and Business Research, says No.

The Eurozone crisis never went away. It merely took a break from newspaper covers as Brexit took centre stage. Non-performing loans, skyrocketing youth unemployment, the failure of extraordinarily loose monetary policy to kickstart a proper recovery – these have been there all along and this is the real crisis. Italy’s troubled banks are the latest manifestation of systemic issues plaguing the currency union. It certainly brings us into dangerous territory – at CEBR, we’ve repeatedly highlighted Italy’s banking sector as the bloc’s biggest risk. Will it bring the Eurozone back to the front pages? Highly likely. Will it lead to a Eurozone break-up? Not as likely. Eurozone politicians have proven again and again that politics come before economics and that the union is here to stay. Some options are already on the table, such as boosting bank fund Atlante or, as a last resort, using taxpayers’ money. It wouldn’t be a first: it was taxpayers that bailed out French and German banks via the Greek state bailout.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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