Austria and Italy: the EU's good, bad and possible ugly
15 Dec 2016
The EU has received mixed news
Let's start with the good news
In a rare moment of respite for the EU, the Austrian public have elected a pro-EU president. Leading up to the vote, the polls had forecast a tight result with a strong showing for the populist far right candidate, which could have been another thorn in the side of the EU.
But then news filtered through from Italy that Matteo Renzi’s constitutional reforms were in trouble. Mr Renzi had called a referendum seeking to streamline Italy’s constitutional processes. But similar to the UK’s referendum on EU membership it quickly became apparent that voters would be voting for reasons unrelated to the referendum issue.
In fact, the referendum result delivered a thumping defeat. With a high turnout there can be little doubt that the vote was anti-establishment in the same manner of Trump and the UK’s Brexit referendum.
The Italian referendum result is bad news for the EU for two reasons.
Firstly, it seems likely that with Mr Renzi’s resignation there will be a general election some time in 2017. None of the main opposition parties in Italy are seeking to take Italy out of the EU, but Beppe Grillo’s Five Star Movement would seek to abandon the euro currency.
Put a 2017 Italian election alongside the other Eurozone elections in The Netherlands (March), France (April) and Germany (October), and possibly in Spain (where the government remains an unstable coalition) the possibilities for further damage are obvious. If either Italy or France elect a Euro-sceptic leader in 2017 then that could spark a series of events which could see the Eurozone fail.
Secondly, the referendum result could harm Italy’s banking sector. It was already under pressure, suffering from exposure to bad loans and widespread weakening in key asset ratios. Some of those banks had tentative plans to repair their balance sheets by raising funds from investors. That fundraising will likely now be harder in volume terms and in price. Some commentators are saying that the Italian government may have to step in – at a time when public debt is already at record levels.
And the possible ugly
I am by nature an optimist, but I fear for the EU and the Eurozone. Regional and national politicians seem incapable of acting with the required urgency or on the scale required to turn the tide of anti-EU sentiment in time to influence those voting in the 2017 elections.
That said, there are plenty who don’t fear or even seek the break-up of the EU and/or the Eurozone. They believe that the region will be better financially and socially in the long run if not confined by interference from Brussels. They believe that those forecasting doom have been wrong before and will be wrong again.
The implications of all this for business are rooted in risk identification and management, starting with supply chain and working capital assessment. You may have relatively little exposure to the Eurozone economies, but do your customers and suppliers? Are you ready to deal with a general slowing in regional economic activity?
There will be volatility around these elections, whatever the results. Outside of them something else will happen that impacts the future of the EU that we have yet to anticipate. In time, 2016 might be seen as just a warm up for the main event.