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Magna Graecia
Italy: The Real Phantom Menace

While the world focuses on Greece, an unexpected election reveals nearby Italy as the true destabilizer in the region. A messy transition could spell the end of one of Italy’s most promising environments for fiscal reform in decades. Reuters reports:

When the 89-year old president of Italy, Giorgio Napolitano, announced this week that he is stepping down soon because of his age, he urged Italians to embrace something that has always been in short order here: national unity and trust in each other and in Italy’s institutions […]

Napolitano’s looming departure creates an immediate political quandary for [Prime Minister Matteo] Renzi: Can he bring Italy’s famously fractious political factions together to choose an acceptable presidential successor? If he navigates that battle successfully, there may hope for the coming war to remake the Italian economy and reduce its out-of-control debt, which stood at 132.6 percent of GDP in 2013 and is expected to hit 138 percent for 2014.

An acrimonious debate threatens to destabilize Italy’s government at a time when the country finally holds a fragile coalition in favor of reform. Prime Minister Matteo Renzi passed a law in December that reforms Italy’s fabulously baroque two-track employment system; as the Financial Times’ Simon Kuper describes it, “The old have nice pensions, the middle-aged are unsackable and the young fight for temporary contracts.” But a lot more work on Renzi’s part is needed to make up for decades of political misrule—and with the Italian unemployment rate at a record high, it’s not going to be easy.

Greece’s political fallout may be dramatic, but the nation’s small size means that any electoral outcome is unlikely to permanently affect the future of the European project. Italy, on the other hand, is the eighth-largest economy in the world. Napolitano’s retirement threatens to release a slow-moving parliamentary morass that could erase Italy’s golden moment for reform and poison its relations with the European Union as a whole.

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  • Andrew Allison

    And why, pray tell, would anybody trust the institutions which have turned Italy into Greece writ very, very large? The sad truth is that Renzi has no hope of implementing the reforms required to bring Italy back from the brink. It’s Italy, not Greece, which will bring the eurozone to its knees. It’s just a matter of time.

    • JR

      Agreed. Let club med countries go through their inevitable bout of hyperinflation already. Real incomes in places like Greece, Italy, and to a bit lesser extent, Spain and France, rose way faster than productivity and the countries became uncompetitive. Inflation (defaulting on debt) is painful but way shorter than deflation (paying of the debt).

      • f1b0nacc1

        This is likely about to begin shortly. Even the French are acknowledging that if the left-wing triumphs in the upcoming elections, that the Greeks will be forced to choose between continued austerity and expulsion from the Euro. When that happens, the ‘new-drachma’ will at least help the Greeks avoid the humiliation that plagues Venezuela….they will have plenty of toilet paper.

  • Anthony

    The EU as an institutional framework for promoting both peace and economic growth has certainly been impaired by financial crisis beginning in late 2009. the real problem remains (for both Italy and Greece) high levels of public debt and history of clientelism (to borrow a Fukuyama term). Napolitano’s request faces a politics that’s rooted in viewing government as weak in terms of both legitimacy and capacity. His retirement does not change system nor consensus against more serious structural reforms that forced Mario Monti out. So, EU continues to grapple with one of shortcomings of Maastricht Treaty.

  • Jacksonian_Libertarian

    It’s a race to see which country withdraws from the Euro or the Eu first, England, Greece, Italy, or some other country. What we do know is that once one leaves, the dominoes will fall quickly just as they did when the Soviet Union and Warsaw Pact disintegrated.

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