Italy: the eurozone’s weakest link

877_MW_P06_italy — Anti-euro populists are ahead in the polls

Ten years ago the head of Italy's industry association, Luca di Montezemolo, made a speech outlining ten urgent structural reforms that businesses wanted the government to enact, notably a reduction in red tape and a lower tax burden."I could give that same speech today," he recently told The Wall Street Journal. That's Italy's problem in a nutshell: almost total paralysis.

Italy's debt has reached an unsustainable 130% of GDP and the economy has barely expanded since 1999. Political instability has thwarted serious reform efforts to raise the economy's speed limit, which is crucial to getting debt under control. In 2012, Italy's debt problem threatened to spiral out of control, with the markets selling off bonds and thus raising yields, or implied interest rates. The single currency would not survive an exit by a founding member of the EU.

This year, "fears about the integrity of the euro" could well resurface, as Philippe Legrain of the London School of Economics told the FT. The populist Five Star grouping, which is anti-euro, is ahead in the polls, with national elections due in March. The governing Social Democrats are second, with the right-wing populist Northern League in third place, just ahead of the centre-right party led by former prime minister Silvio Berlusconi.

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The Five Star group has ruled out coalitions, and the most likely result is a fragile collation, probably more eurosceptic in tone than the current government. We can expect more spats between Rome and Brussels and no progress on reforms. Bond buying by the European Central Bank is keeping the wolf from Italy's door for now by artificially lowering interest rates on state debt. But this spring we will be reminded that the euro crisis has merely been managed in the past few years; it is still far from resolved.