With the exception of Greece, Italy is the Eurozone country with the highest debt-to-GDP ratio (132 per cent). In absolute terms, the country accounts for almost one quarter of all government debt in the Eurozone. This situation is compounded by Italy’s anaemic potential growth, its adverse debt trend, and Italian banks’ strong dependency on exposures to their own government. Among the country’s financial strengths are its fairly reasonable level of private debt, its position as a net creditor internationally and its almost total lack of implicit debt. Nonetheless, Italy is at risk of insolvency over the next few years. The Eurogroup does not have a viable strategy for dealing with an uncooperative Italian government. It is already the case that key criteria of the Stability and Growth Pact (SGP) are, in effect, not being applied to Italy. Italy is regarded as being ‘too big to fail’, which means that Europe cannot afford to allow the country to undergo a disorderly insolvency. Italian voters’ decision to support populist economic policies is therefore to a certain degree rational: by doing so they can justifiably hope to force the ESM and ECB to grant fresh loans, thereby providing a transfer solution to Italy’s impending insolvency. The euro area’s consistent refusal to discuss reforms around insolvency procedures is now coming home to roost. New stabilisation mechanisms currently being widely discussed as part of the Eurozone reform debate would not do much to help Italy today because the country currently finds itself in a normal cyclical situation. If, after the election, Italy has installed a government which – similar to the Greek government in early 2015 – retracts its consensus with the Euro-group, this would create a highly risky political and economic scenario that would herald a new phase of considerable political and economic uncertainty and, ultimately, could pose an existential threat to the Eurozone and the EU.

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