ItalEXIT. Hype, Hope or Reality?

Brexit is a reality since 23:00 GMT on 31 January 2020. Over the years, the hypothesis of Italy following Britain is gaining popularity. In particular, over the past year, following the irrational, self-inflicted and destructive covid-induced policies and lockdowns, there is revived interest in the idea.

The goal of this blog is not to provide a critique of the idea of ItalEXIT. What we want to focus on are certain aspects that need to be considered rationally and realistically before moving forward with the idea.

It is clear that Italy is not the UK. For starters, the UK has the Pound Sterling, Italy has the Euro and is deeply integrated into the Euro system. While it took the UK four years to complete the Brexit procedure, that alone suggests that in the case of Italy it would take much longer. Let’s also forget the fact that the EU would do everything it could to prevent this from happening as it would probably try to ‘punish’ Italy on various fronts. The departure of Italy from the Euro would probably mean the end of the Euro itself and this is probably the main obstacle in the face of a hypothetical ItalEXIT. We all remember the 2014 Greek crisis and what it did to the markets. Again, these aspects of the Italexit idea are not under consideration in this blog.

Experience suggests that a good problem statement is half the solution. This is because a good problem statement also hints a possible solution. First of all, it is a good idea to get an appreciation of the magnitude of the problem. The problem of detaching Italy from the Euro/EU system has to be defined first. This may seem easy: the goal is to leave the Euro, create a new currency, satisfy all debt obligations, etc., etc. In theory yes, that is the goal. But, as mentioned, in order to postulate the problem rationally and in a credible manner one should first appreciate the magnitude and complexity of the undertaking. To that end, we illustrate the Resilience Map of the EU computed using only 24 GDP-related variables of each member state. The data is from EUROSTAT.

Gross domestic product at market prices	Changes in inventories
Final consumption expenditure	Acquisitions less disposals of valuables
Domestic demand	Exports of goods and services
Household and NPISH final consumption expenditure	Imports of goods and services
Final consumption expenditure of households	External balance of goods and services
Final consumption expenditure of NPISH	External balance – Goods
Final consumption expenditure of general government	External balance – Services
Individual consumption expenditure of general government	Gross value added (at basic prices)
Collective consumption expenditure of general government	Taxes less subsidies on products
Gross capital formation	Compensation of employees
Gross fixed capital formation	Gross operating surplus and gross mixed income
Changes in inventories and acquisitions less disposals of valuables	Taxes on production and imports less subsidies

There are 648 variables (27 x 24). The map is the following:

There over 73400 interdependencies between the said 648 parameters! And we’re talking of an extremely gross and simplified picture! The above analyses, which we have been performing every quarter for the past fifteen years, provides a system reflection of the EU’s state of health, its resilience, the resilience of each member state, concentrations of fragility and allows us to study the resilience (risk exposure) of the entire system in hypothetical scenarios (a sort of ‘what if?’ analysis).

If we use data from the World Bank, which covers many more dimensions, we have approximately 1000 variables per country, with a total of over 27000 variables and over 300.000.000 interdependencies! Now, in order to understand a system and its dynamics – remember, nothing remains constant – one must be able to explain its interdependencies as they are responsible for its functioning. The interdependencies are crucial here because Italy, like any other EU member state, interacts with the other countries though these interdependencies. This means, that in order to perform the Italexit one must first understand if and how a part of these interdependencies would be altered or broken, i.e. what would ItalEXIT do to Italy and the EU itself. It would be an amazingly complex operation of digital surgery. The problem is evidently hugely intricate if seen from a systemic perspective, which, by the way, is the only perspective that makes any sense. Remember, Brexit would be a joke compared to what an ItalEXIT might be because of the tight monetary integration.

So far, we said nothing of another crucial aspect of the problem. Due to its irrational covid policies and, lately, because of the strategically flawed proxy war which the EU is fighting for the US in Ukraine, the EU is in a crippled state. The evolution of resilience – subject dear to the EU because of its National Recovery and Resilience Plans, which ought to increase resilience – is shown below.

The resilience of the EU is on a downward trend. This is in fact the worst moment in time to propose an ItalEXIT. Furthermore, the resilience of Italy is going down too. During the first 9 months of the National Recovery and Resilience Plan under the Draghi government, Italy lost 3% of its resilience. Both charts have been produced using EUROSTAT’s data.

So, we’re talking of two wounded animals facing eachother and with contrasting interests. Just imagine the consequences. Can you imagine, for example, Italy and the EU renegotiating the money Italy has already received in the framework of the National Recovery and Resilience Plans?

Finally, let’s keep in mind one thing: when the UK put the idea of Brexit on the table, their resilience was just over 91%. That helped them a lot. Today, Italy’s resilience is around 70%. It too was around 89% in 2018. What would it be after a, say, ten-year struggle with Brussels? Sixty percent? Fifty percent? What would the resilience of the EU be? In a post-Italexit scenario Italy would need badly a strong business partner, not a crippled one. But Italy’s exit from the Euro would probably destroy the EU and drag Europe along. This would further weaken post-ItalEXITItaly. ItalEXIT would be like asking a severely injured person to donate a kidney.

In the face of the current state of affairs – high uncertainty, pronounced turbulence, fragile geopolitical situation – wanting to further fragment the EU would be (potentially) disastrous for the Euro, Europe, hence for the World. Remember what we all thought about the consequences of Greece leaving the EU in 2014 just because a few French and German banks had some interests there (and Europe bailed those banks out with taxpayers’ money)? Can anyone imagine what the effects on the markets would be if Italy invoked Article 50 of the Lisbon Treaty?

It makes you wonder if politicians really know what they are talking about. It is not difficult to get an economist to jot down a few back-of-the-envelope GDP, devaluation or competitiveness numbers in a hypothetical scenario of this sort. The problem is, operations such as ItalEXIT cannot be designed on the back of an envelope. They are designed for electoral reasons only. Just empty and vague slogans that may get you a few seats in a corrupt parliament. Politicians should be held accountable for what they say.

Having said all that, is ItalEXIT a realistic idea? Absolutely not. Putting it on the table today? Folly. Speaking of Italexit to the Italian electorate today, in virtue of the upcoming 25-th of September elections, is irresponsible. And I am biting my tongue.