Lavish Rome Treaty Summit Will Skirt Issues in Stumbling Italy

(Bloomberg) -- As leaders celebrate the European Union’s 60th birthday in Rome this weekend, the host nation may be hoping that a pomp-filled ceremony distracts from any probing questions.

Overshadowed by the sting of Brexit and elections in the Netherlands, France and Germany, Italy’s lingering problems have left it as the weak link among Europe’s powerhouse economies. It’s stumbling through a stop-start slow recovery from a record-long recession, unemployment is twice that of Germany’s, and voters, weary of EU institutions, are flirting with the same kind of populism grabbing attention elsewhere.

The gathering on Saturday on the city’s Capitol hill is to celebrate the Treaty of Rome, the bedrock agreement signed on March 25, 1957 for what is now the EU. From its beginnings as the European Economic Community -- with Italy among the six founding members -- it has since grown to a union of 28 nations stretching 4,000 kilometers from Ireland in the northwest to Cyprus in the southeast. The U.K. is heading toward a lengthy exit from the EU known as Brexit, raising questions among the remaining 27 about the bloc’s long-term future.

“Italy was until very recently at the forefront of the European integration process,” Luigi Zingales, professor of finance at University of Chicago Booth School of Business, said in an interview. “Today it’s undoubtedly Europe’s weakest link.”

The economy grew just 0.9 percent last year, below the euro area’s 1.7 percent, and unemployment is at 11.9 percent. A recent EU poll put Italy as the monetary union’s second-most euro-skeptic state after Cyprus with only 41 percent saying the single currency is “a good thing.” The average in the 19-member euro area is 56 percent.

That widespread disenchantment may be felt at elections due in about one year. A poll published on Tuesday by Corriere della Sera put support for the Five Star Movement, which calls for a referendum to ditch the euro, at a record 32.3 percent, well ahead of the ruling Democratic Party. Summit host Prime Minister Paolo Gentiloni has only been in power since December, when Matteo Renzi resigned after losing a constitutional reform referendum.

For Zingales, Italy has problems that European policy makers “would rather not talk about now as they don’t want to scare people.” That’s because across the bloc, politicians are still fighting voter resentment over the loss of wealth since the financial crisis, bitterness about bailouts and anger over a perceived increase in inequality.

“Sixty years after the signing of the Treaties of Rome, the risk of political paralysis in Europe has never been greater,” Bank of Italy Governor Ignazio Visco told a conference in Rome this month.

Unpopular Euro

According to analysts at Bloomberg Intelligence, the euro is unpopular in Italy “for a good reason,” having created imbalances, stymied productivity growth and hurt the recovery. They say look beyond the French elections and the “habitual” crisis in Greece and see that Europe’s big medium-term risk is Italy.

“The French and German political leadership is so focused on domestic politics, that they do not want to deal with or indeed shine a light on Italy’s problems, for fear of jeopardizing electoral prospects,” said Marc Ostwald, a strategist at ADM Investor Services in London.

With the broader euro-area economy looking healthier than it has in years, that’s shifting the European Central Bank toward a scaling back of quantitative easing and -- very gradually -- closer to an interest-rate increase. That could mean even more pain for Italy, whose public debt exceeds 130 percent of gross domestic product, the highest ratio after Greece.

“The real elephant in the room here is the direction of monetary policy and everyone knows that the QE won’t last forever,” said Federico Santi, a political analyst at Eurasia Group in London.

Italy’s other problem is the health of its banks, lumbered with 200 billion euros ($216 billion) of bad loans. The financial industry remains in the spotlight even after the government agreed to help with a 20 billion-euro fund for Banca Monte dei Paschi di Siena SpA and other troubled banks.

The European Commission warned last month that the country faces excessive economic imbalances as the shaky center-left government struggles with debt, weak growth and a hobbled banking sector.

“It wouldn’t take much for one of Europe’s biggest economies, where the euro is already unpopular, to be tipped into crisis,” said BI analysts led by Jamie Murray. “It’s Italy, not Greece or France, that’s most likely to bring down the single currency.”

--With assistance from John Follain Vernon Silver and Ross Larsen

To contact the reporters on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net, Giovanni Salzano in Rome at gsalzano@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Kevin Costelloe