By Lili Bayer
Italy is moving to the forefront of history due to its evolving banking crisis. But to understand this crisis and its implications, it is necessary to understand the underlying geopolitics. The banking crisis is a small eddy in the larger current of Italy, and Italy is a larger part of Europe than many people realize. All events require perspective, and this is intended as a framework for thinking about Italy. Let us begin with the heart of Italy: Niccolo Machiavelli.
In the final chapter of The Prince, Machiavelli exhorts the leader to “liberate Italy from the barbarians.” In Machiavelli’s time, Italy was not a political entity, and the age of nationalism was still a few centuries away. Italy was highly divided and fragmented. Nevertheless, Machiavelli ends his treatise with this quote from Petrarch:
“Virtue against fury shall advance the fight,
And it in combat will soon put to flight.
For the old Roman valor is not dead,
As it lives on in Italian hearts.”
Today’s Italians may be far removed from the ancient Romans, but some of the geopolitical dilemmas decision-makers in Rome experience today echo those of ancient strategists. The geopolitical challenges facing Italy are in part the result of millennia-old geographic vulnerabilities and modern postwar dilemmas about the future of European sovereign states. Each country’s grand strategy emerges from permanent realities. A country’s geographic position, demographics and climate are enduring, unchangeable factors that constrain the country’s options. These limitations lead countries to develop certain priorities and make strategic choices. Regardless of ideology, leaders pursue the country’s overarching grand strategy.
Italy’s grand strategy consists of three key goals:
1. Neutralize potential threats emanating from north of the Alps and the Mediterranean region.
2. Overcome centrifugal tendencies and maintain the country’s unity.
3. Preserve economic stability.
Neutralize Potential Threats
Italy is highly vulnerable to invasion. To the north, the Alps separate Italy from the rest of Europe. Nevertheless, unlike some other mountain ranges, the Alps are relatively easy for invaders to cross. From Hannibal to Napoleon, armies marched through numerous Alpine passes into Italy. The Italian peninsula’s thousands of miles of coastline also make it vulnerable to invaders. The coast of Tunisia is at one point less than 100 miles away from Marsala in Sicily. The southern Italian city of Otranto is less than 60 miles away from the coastal Albanian town of Vlorë.
Much of Italian history can be observed through waves of invasion and settlement, from ancient Greek colonists from the east and Gauls from the north to Albanians and North Africans. For hundreds of years, rival European dynasties competed over parts of Italy, sending armies to enforce their will as alliances and claims to various thrones and positions of power shifted.
At the height of its power, the Roman Empire overcame this vulnerability by turning the Mediterranean into a Roman lake – practically all coast lines in North Africa, the Eastern Mediterranean and Southern Europe were under Roman control. For Rome, any rival powers in the Mediterranean were a threat. The destruction of Carthage as a result of three wars with Rome highlighted the strategic importance of neutralizing threats emanating from the North African coast and the waters surrounding Italy. Moreover, the Romans pushed north beyond the Alps, creating a vast buffer zone between the core of the empire and its farthest reaches, in what is today Germany.
Modern-day Italy lacks the power to turn the Mediterranean into an Italian lake, and cannot expand north of the Alps. As a result, in order to pursue its primary strategic goal of neutralizing threats from the north and from the Mediterranean, Italy has become part of a web of political, military and economic alliances. Historically, two of the primary foreign actors waging wars and attempting to maintain political control or influence in Italy were the Habsburg Empire and France. The Habsburg Empire no longer exists, but Germany has overtaken the role of the leading power in the middle of Europe. As a member of the European Union and the eurozone, Italy is economically integrated with both France and Germany. Therefore, safeguarding the stability and security of Italy is in the interest of decision-makers in Paris and Berlin.
At the same time, as a member of NATO, Italy enjoys the protection of the United States, as well as leading European military powers like Britain. On its own, Italy cannot pursue its goal of neutralizing threats coming from North Africa. But as a participant of military coalitions, like the one employed in Libya in 2011, Italy can pursue its interests in the region.
One of the ironies of Italy’s geography is that while it is not difficult to invade parts of Italy, it is both difficult to invade the entire country and to hold the territory together. Italy is fragmented and difficult to traverse due to its mountainous geography. The Apennines run north-south across Italy. The mountains, coupled with the relatively limited availability of navigable rivers, have constrained trade and economic development across much of Italy. There were periods of great prosperity for coastal cities like Venice, but this level of prosperity generally did not extend into the interior.
Italy’s geography is the key challenge to its strategic goal of maintaining unity. Historically, Italy’s mountains contributed to the development of regional and cultural differences. Up until the French Revolution, the political concept of Italy did not exist. The area was not only under the control of different powers and leaders, but also boasted significant regional diversity. In fact, as historian David Gilmour points out, when Italy was unified in 1861, no more than 10 percent of the population was familiar with what we now consider the standard Italian language. As late as 1974, more than half of Italians spoke in dialect within their families.
Regional economic disparities in Italy are far from new. Disparities developed due to both geographic factors and historical differences. The south has fewer irrigable river systems, the summer heat is more intense and there is less rain. Up to half of the region’s land is not suitable for cultivation due to mountainous geography. Historically, the southern rural economy was dominated by the latifundia system, where feudal landlords owned large-scale estates and hired landless laborers to work the land. Moreover, rulers who controlled parts of southern Italy, such as the Spanish Bourbon dynasty, were less interested in implementing economic reforms and promoting development than some of their counterparts in the north. Significant land reforms only took place in the region after World War II. Despite government efforts to boost development, however, southern Italy has generally suffered from lower investment levels than the more industrial north. Moreover, poor governance has traditionally created space for the Mafia to operate, with criminal activity often concentrated in the south. Organized crime remains a significant challenge.
The country’s financial troubles have accentuated regional differences. Investment and GDP levels contracted at faster rates in southern Italy than in the north in the five years following 2008. European Union data from 2013 show that, when measured as purchasing power, GDP per inhabitant in parts of northern Italy is comparable to that of regions of Scandinavia. Calabria, in southern Italy, has a GDP per inhabitant in purchasing power that is comparable to parts of Poland, at only about 57 percent of the European Union average.
This regional economic divide is echoed in unemployment levels and banking challenges. An estimated 70 percent of those Italians who became unemployed between 2007 and 2014 were in the south. Similarly, southern regions tend to have higher non-performing loan rates. This phenomenon has developed because in the south, the total stock of loans has decreased while the value of bad loans increased. According to the Bank of Italy, about 27 percent to 28 percent of loans to companies in the southern regions of Molise and Calabria are outstanding, compared to merely 5.6 percent in the northern region of Bolzano. Banks are less likely to see debts repaid on time in the south, a factor that no doubt contributed to banks issuing fewer loans in southern regions. Reduced lending, in turn, contributes to the economic stagnation of these regions.
There is no serious threat of secession in Italy today, but political, cultural and economic diversity across the country raises the threat of significant fragmentation, especially in times of crisis. The xenophobic Northern League party, which formerly advocated secession from Italy but later moved toward advocating a model closer to devolution, has thrived on regionalism, anti-immigration sentiments and economic resentment. Despite poor performance at the last election, according to Italian news portal LA7, the Northern League was polling at around 16 percent in mid-January. Even in a united Italy, there are long-standing centrifugal tendencies that persist under the surface that Italy must contend with in order to maintain its unity and sovereignty.
Maintain Economic Stability
Italy is struggling to achieve its third strategic goal of maintaining economic stability. The Italian government’s tactics for achieving this goal have focused on the country’s relationship with other eurozone countries, especially Germany. On one hand, thus far Italy has sought to remain a member of the eurozone, which allows the country to enjoy close economic and trade relations with European partners. On the other hand, decision-makers in Rome have sought various opt-outs and concessions from the European Union, especially when it comes to fiscal rules.
Italy’s economic problems run deep. GDP growth is sluggish: in 2015 real GDP growth was estimated at 0.9 percent, after shrinking by 0.4 percent in 2014. Italy’s public debt ratio is the second largest in the eurozone, after Greece. According to the European Commission, Italy’s gross public debt stood at about 132 percent of GDP in 2015. The Commission has warned that high debt levels are leaving Italy vulnerable to external shocks and limit the country’s ability to make productive expenditures. Last year, the country’s interest bill amounted to 4.3 percent of GDP. Moreover, as Geopolitical Futures outlined in our forecast for 2016, Italy will be at the center of the eurozone’s crisis this year as non-performing loans pose a significant challenge for the country’s banking system .
Both the issue of budget flexibility and the crisis of non-performing loans are bringing Italy into conflict with the European Union. In theory, Italy is bound by European rules to aim for a debt-to-GDP ratio of 60 percent or less. At the same time, Italy’s expected expenditure levels risk violating European budget policies. The government in Rome is negotiating with the EU for permission to spend more money. For Italian decision-makers, adhering fully to European fiscal rules would entail domestic economic disruptions. Italy is thus using levers such as threatening to veto EU initiatives regarding the refugee crisis in order to gain concessions on budgetary matters.
A similar process is ongoing when it comes to non-performing loans. According to the European Banking Authority, about 17 percent of all Italian loans are non-performing. The proliferation of bad debt in Italy’s banking system is limiting the country’s ability to stimulate growth, and threatening to destabilize the system. European Union rules that came into effect fully in January bar Italy’s government from directly assisting banks, unless shareholders and bondholders take some losses first. This policy, known as bail-in rules, poses a dilemma for Italy’s policy-makers. Italy reached a deal with the EU to help banks offload bad debts, but it remains unclear whether the limited tools and incentives available to Italian banks are sufficient to address the problem. Italy’s strategic goal is to maintain economic stability, and that entails ensuring that major banks do not fail and that ordinary citizens retain confidence in the banking system as a whole.
The dual issues of public debt and non-performing loans test not only Italy’s relationship with the EU, but its relations with Germany, Europe’s economic powerhouse and the dominant country in the eurozone. Berlin does not wish to foot the bill for Italy’s financial troubles, but German decision-makers understand that it is in Germany’s strategic interest to maintain a stable eurozone – and thus an economically stable Italy. Therefore, Germany has so far been willing to grant Italy some concessions, but as the country’s financial troubles intensify, Rome may be forced to choose between immediate economic stability and adhering to EU rules and German demands.
Italy has three primary strategic goals. The country is not a major military power, but it is working to achieve its first aim of neutralizing outside threats through a network of military, economic and political partnerships with leading powers. The country’s second strategic goal, of maintaining unity, has been fulfilled, but leaders remain vigilant since regionalism and regional economic disparities persist as a threat to the consolidation of national unity. The goal of maintaining economic stability poses the greatest challenge for Italy, as the country faces low growth, high levels of non-performing loans and the continued challenges of unemployment and high public debt. The pursuit of economic stability is testing the durability of the relationship between Italy and the European Union, and especially its relations with the dominant power in Europe, Germany. Italy is a significant player in European geopolitics primarily due to the risk any financial crisis in Italy could pose for the rest of the eurozone. Italy remains a vulnerable yet strategic country – an important player in Europe that must grapple with powerful continental players and challenges emanating from the Mediterranean region in a bid to fulfill its strategic goals.