European Union on Bumpy Ride

Taken from our blog,”Brink of economic thoughts”

European Union on Bumpy Ride

Introduction

World economic forum is contention about contingent possibility of European Union future. It can be possible that EU may face isolation, due to US election, Mr. Trump republican candidate enhancing each and every co-operation and treaties of US, he might be pondering not to triumph that can increase US defence expenditure, including more than 5 decades of protection ensured by the US to Europe, Trump might be reckoning these aids as groaning for US strain, which can isolate EU completely and Trump interest for Russia can ruin EU hegemony in entire Europe. This article will be penetrating on the relation of Italy with EU. The subheading 2.1 assess the political scenario of Italy and depicting instability in Italian politics, 2.2 subheading will pave Italian banking history, 2.3 will justify causes behind the banking fiasco, 2.4 will determine present status of banking sector, 2.5 will be conclusion.

Abstract:

This article impending Italian banking crisis and its root causes, it also examines the legacy of Italian banking system from the era of Great depression and after World war second, how Italian leading banks like Monte Dei Paschi Di Siena (MPS) fallen under debt crisis with cascading effect of state sovereign crisis. This article further tries to reckon futuristic existence of EU with Italy, it also impend present Italian banking crisis, at last it suggest the panacea to tackle this bewildered situations by implementing various monetary methods.

Political instability by Referendum 2.1:-

Poola Gentiloni look office after this parliamentary colleague Prime Minister Matteo Ranzi  resign due to humiliating rejection of his constitution reform a referendum on November 2016. Italy got this constitution after the World War 2nd the primary motive behind Italy constitution was to prevent rise of leader like Mussolini, Prime Minister Ranzi wanted to revamp the constitutional changes, he wanted to provide more autonomy to lower house, strengthening the central government and curbing autonomy of upper house (the senate). This is because he wanted to ease legislation bills more smoothly without less intervention by senate, he believes that with this referendum central government will quickly able to pass pertinent decisions which will further develop trust in investors and therefore it will act as a catalyst to economic growth. But unfortunately opponents’ parties like Right wing northern league and Anti establishment five star movements does not agreed with Ranzi and argued that after this referendum it will give immense powers to Prime Minister therefore it can be harmful in long run, many of his proponents agreed with Ranzi referendum. But I think Ranzi have taken referendum personally by announcing his resignation if he fails.

Italy Banking History 2.2:-

Italy not only faces instability in banking system, but also resurrection in level of unemployment with measurable gap between developmental activities in its Northern and Southern hemisphere. Before I start penetrating on various causes for Italian banking crisis I would like to retrograde Italy banking history after 1930 era including World War 2nd blot. In 1930 and after that Italy has started its economic growth, it also started the proliferation of its banking sector and banks like Monte dei Paschi and other have also started its banking activities in Italy but these banks primarily do not have profit motive, they were operated by the public bodies and help to promote the society for betterment, competition and profit motive was remaining absence. But after end of 1989 these saving banks gained licence and inspiration for profit, law called Amato Carli named after (two state strain ministers) which gave freedom to every public bank to earn profits in slew. The profit maximise competition was started with in banks and single licence system broke the boundaries for Italian banks to operate in entire Europe. In 1993 the EU has passed the Consolidation law under which EU has got the power to incubate number of Italian banks by guiding, instructing them in various monetary policy issues and even deciding the exchange rate for currency by eradicating Italian Lira. This implies Italy banking system completely dissuade by EU central bank, the Consolidation law EU again amended as DE facto law in 1998 which have legislation that private entrepreneur’s can acquire shares of various public banks, not only in Italy but in entire Europe. The situation became more alarming after 2000 when all Italy public banks were totally privatise.

 

Monte dei Paschi di Siena MPS crisis 2.3:-

Monte dei Paschi di Siena the leading bank of Italy which have more than 50 per cent share in banking sector. After 2000 the Italian Governor (Antonio Fazio) started to impede foreign invasion in banking sector by dirigisme approach, even auctioning for banks (like Banca Marche). Symptom of Italian banking crisis was not primarily subjected to only bad loans, but the connection between the local politician and Italian banker’s patronage for piling up revenue deficit catalyzed crisis.

 

As after the proliferation of De facto and consolidated law it was easier to acquire number of share in various banks.  MPS regularity were getting injection from the European central bank and the Deutsche bank of 2011 got bail for 2.5 billion, latterly in 2013 two more bail of 3.3 billion dollars were allotted by the ECB. The EC have taken this matter seriously and it investigated the crisis under leadership of EC commissioner Jaoquin Almunia his report suggested that the connection between local politicians with the major banks was primary cause of failure. This investigation further discovered that Monte dei Paschi di Siena Foundation one who has more than 50 per cent share in banking system has pave  profits to finance societal activities, financing for soccer team, hospital aids, museums and even provided the aids for lower housing cost while construction.

 

Present scenario of Italian banks 2.4:-

The government has created more than 20 billion reserved for future uncertainties mainly backing for crumbling banks, this primarily indicating decreasing trust of Italian government on banking sectors. It has been observed that after 1999 when euro was introduce the growth rate of Italy has downgraded, Italy has more than 18 per cent bad loan (None performing asset NPA) which approximately equal to 360 billion euro. This figure alarming dangerous spectre in banking sector but these uncertainty may revamped by adopting various monetary instruments. They are:-

  1. By tapering lending rate can infuse increment on loan payment and can even reduce NPAs.
  2. Italian authority can launch open market operations for ebbing extra amount of money from Italian market.
  3. Italy government can dissuade its taxpayer to pay for banking crisis.
  4. Italian government can indentify its performing assets and therefore write off all NPAs and then start allocating fresh prime loans.

 

Conclusion:- 2.5

It will be difficult for European central bank (ECB) to triumph or feed its tentacles peer to peer by every time bailing each tentacle for this failure. Therefore if Italy would have monetary policy independency he could depreciated or appreciated its currency by its own, even tinkering with its fiscal measure for balancing the crisis. For ECB it can have serious implications, increment in number of bail outs will shrink ECB strain and therefore possibility for crashing Euro may jeopardise. I think every time history tries to teach us some lesson, too much dirigisme by the government cannot not succeed for last long. How can we forget what happen to Greece while of 2011 crisis why he had to squeeze its economy even though Greece economy was creeping for stimulus, demanding liquidity injections for increase in pension payment, for improving its medical facility, for infuse its economic growth but unfortunately he had to do just opposite due to dirigisme of EU.

 

 

Mohit Pandey

Pursuing Economics Honours  3rd year.

Doon University Dehradun. (Uttrakhand)

Gmail address: Mohitpande2@gmail.com, Mohit.doon98@gmail.com

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