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Italy next in the slow motion Eurozone train crash

The impossibility of running a single monetary union without a central government to operate fiscal policy is becoming increasingly clear to those at the heart of the Eurozone.  Having witnessed the collapse of economies on the periphery of Europe – Greece, Ireland, Portugal and Spain – with the inevitable imposition of austerity for the people and bailouts for the banks, we are now seeing the crisis move into the Eurozone’s third largest economy.

With $540 billion in non-performing loans, Italy’s banking system is insolvent in all but name.  The Italian government is desperate for a taxpayer funded injection of around $60 billion to stave off collapse.  But as Stephen Bartholomeusz in The Australian notes:

“The problem for Renzi and Italy — and the EU — is that the rules of the European Banking Union forbid taxpayer bailouts as the first resort for troubled banks. The rules, years in the making, insist that shareholders and creditors are “bailed in’’ before taxpayers can be called on.”

The Eurozone bail-in process involves allowing banks to convert shareholdings into deposits and then to confiscate depositors’ funds in order to make up the shortfalls on their loans.  But the threat of this leads to capital flight as investors and depositors move their money elsewhere before it can be confiscated.

In the wake of the British vote to leave the EU, the Italian government had hoped that the rules would be suspended.  But European Central Bank officials and Germany Chancellor Angela Merkel have ruled this out.

With a growing Eurosceptic bloc among Italy’s electorate, the fear now is that faced with another banking collapse, and following the British example, Italy may do what the Greek government failed to do and simply walk out of the Euro and – if necessary – the European Union itself.

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