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The EU is finished if it doesn't allow Italy to fix its banks

The Italian prime minister Matteo Renzi has accused the EU of behaving like the orchestra on the Titanic

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Political standoff over Italy's non performing loans threatens renewed EU crisis Photo: ALAMY

By Jeremy Warner

7:52PM GMT 13 Feb 2016

If you want to know what proper “secular stagnation” looks like, go to Italy. The Italian economy has essentially gone nowhere since the turn of the century, which lest it be forgotten coincided almost exactly with the launch of the euro. Output today is roughly the same as it was then. 

This might seem shocking enough; not even the Great Depression produced such prolonged misery. Yet the way things are going, Italians can look forward only to years more of the same. 

• Stagnating Italy poses new headache for stuttering eurozone

Attention last week focused on the travails of Deutsche Bank, but the true epicentre of the latest leg in the European banking crisis is Italy. 

Heroic efforts by the Italian prime minister, Matteo Renzi, to lance the boil and give his country at least a fighting chance of resumed economic growth are being stymied in Brussels by pen pushing adherence to new state aid and bail-in rules. 

Europe won’t allow Italy to bail-out its banks, yet the EU won’t come to the rescue either. It is small wonder that Mr Renzi has taken to referring to the numbskulls of the European high command as like the orchestra on the Titanic. Rome burns, yet they just keep on fiddling as if nothing is wrong. Rarely has European pigheadedness over-ruled reasonable pursuit of the national interest quite so destructively. Greece threatened to be the straw that broke the EU's back; it may yet prove to be Italy. 

The International Monetary Fund estimates that the Italian banking sector’s non performing loans amount to an astonishing 18pc of GDP. Attempts to set up a “bad bank” along the lines of Ireland and Spain to relieve the system of this giant overhang of rotten lending have fallen foul of the latest adjustments to state aid rules. At the same time, Europe insists on using Italy as a testing ground for new bail-in rules which would require Italian retail investors to accept haircuts on €200bn of subordinated notes they thought to be risk free. Politically, this is bound to be unacceptable. 

If Europe’s elites had consciously set out to bring the whole house of cards tumbling down, they could hardly been more effective about it. The Treaty of Rome is where it all began; it may also be where it ends.