Commentary by Kirsten WILLIAMS
On 24th June, Europe woke to the shock decision by the UK – in reality only England and Wales – to leave the EU. International media was quickly consumed by a spate of resignations, angry protests and near-collapses of established political parties. A quick leadership campaign handed Theresa May the leadership of the Conservative party and therefore the country’s premiership. The relief in the UK was palpable in almost all quarters.
Back on the EU mainland, Brussels started to turn its attention to two other crises in its midst: major trouble in Italy’s banking sector, and the revelation that Spain and Portugal have failed to cut their budget deficits to the EU’s required levels.
Italian banks are seriously struggling with huge amounts of non-performing loans, worth €360bn. Now, politicians in Rome and Brussels must find a way forward in order to contain the issue, but there is very little consensus.
The loans did not sour overnight – this is a long-running problem. However, Brexit does play its part in Italy’s woes. The referendum result sent shares in Italian banks crashing, with big lenders losing a third of their value. The world’s oldest bank, Monte dei Paschi di Siena, has seen its stock price fall by 80% in a year, with a rapid decline in the days following Brexit. The Italian premier, Matteo Renzi, has proposed a €40bn state recapitalisation of the struggling banks. However, under EU laws designed to protect taxpayers, banks cannot receive state aid without investors first providing financial support.
The problem with this legislation is that, in Italy, those investors are not huge corporations who could afford to take a hit, but ordinary Italians. That means that households in Italy would be badly hurt if Brussels imposes the banking laws strictly.
The International Monetary Fund (IMF) has added its voice to the mêlée, citing concerns about living standards and debt and warning that the country could be headed for a two-decade long recession. That would have European, and possibly global, ramifications because of the size of Italy’s economy.
In the long-term, uncertainty surrounding the UK’s exit from the EU will dissuade investors from coming to the Eurozone. A loss of investment will weigh heavily on Italy’s economic performance precisely at the moment when the country needs a boost.
Renzi has lobbied hard for an exception – and in certain circumstances, they do exist. But other EU leaders are reluctant, chief among them Angela Merkel. Of course, other EU leaders do not need the support of Italians to stay in office, whereas Renzi, fresh from losses in mayoral elections, is facing a potentially divisive constitutional referendum in October. Some reports have cited sources saying that Renzi might make a unilateral decision, provoking the ire of Brussels and rocking the boat at a time of increased Euroscepticism.
Spain & Portugal
Meanwhile, Spain and Portugal both missed their budget deficit targets, risking sanctions from the EU. They are the first Eurozone countries to be fined for breaking fiscal regulations. Spain was told to bring its deficit down to 4.2%, but recorded a deficit of 5.1%; meanwhile, Portugal missed its target of 4.2% by 0.2 percentage points. The European Commission accused the countries of failing to do enough to bring down their deficits.
Technically, the Commission could impose fines of up to 0.2% of each country’s GDP, under the “excessive debt procedure”. However, this is unlikely. The Organisation for Economic Cooperation and Development (OECD) has warned the Commission not to be overly harsh. It will probably impose a symbolic sanction of €0, since it is unwilling to put further pressure on the member states at a time of increased economic instability.
Still, the ruling has proved highly unpopular in Portugal in particular, where people have expressed incredulity that they are being punished for missing the target by such a small margin. The Portuguese government has argued that the sanctions are unfair because the country is on track to meet fiscal targets in 2016. Spain, however, will probably not reach its deficit target for this year either.
On the other hand, the Commission’s perceived leniency has been badly received by Germany, the Netherlands, Finland and Slovakia to name a few. Other member states resent what they see as special treatment for Madrid and Lisbon, although Renzi has firmly supported his Latinate allies, along with France and Greece.
Indeed, it now seems unlikely that France will be able to make its own target of 3% by the end of the year. This is not the first time that France has breached deficit targets – in fact, it would be the twelfth. However, the country has never been sanctioned, angering the Portuguese and Spanish who feel that they are unfairly targeted – a sentiment only exacerbated by Juncker’s recent comment that France had never been sanctioned ‘because it is France’.
Both crises risk mass discontent with the political class and in particular with Brussels. If the EU is seen to impose rules that would make ordinary citizens suffer, the European project will become increasingly unpopular. The mistake Cameron et al. made was to ignore the fears and worries of ordinary people. Ordinary Italians, Spanish and Portuguese suffered more than Britons in the crippling financial crisis of 2007-2008. As the successes of the Eurosceptic Five Star Movement in Italy and the anti-austerity Podemos in Spain show, Brussels’ heavy-handedness can backfire. The EU should heed the lessons of Brexit and listen to popular concerns before a mass exodus from the bloc.