The global market and its effects on EU Italian banks

The global market and its effects on EU Italian banks

An introduction to the effects of the global market worldwide

When it comes to the economic prosperity of a country, this is quantified in the currency of their Gross Domestic Product (GDP). The economic growth of a country is defined by the total value of all final goods and services produced within a country over a certain period of time. If countries increase in GDP, it is dependent on their production rates, making the country's goods and services accessible internationally, is advantageous as it can increase their GDP, instilling economic growth.

With so many other countries with like-minded self-preservation agendas, trading between borders has been a historical human practice for aeons. As one of the most significant indicators of a thriving economy, economic growth has a positive impact on national income and the level of employment, which increases people’s standard of living. Factors that affect economic growth include natural resources like oil, minerals, and agriculture. Physical capital and infrastructure, labour force, technology and law.

Two out the four primary types of economic growth, pertain to the use of trading goods and services. Commodity exportations and export-led growths depend on their natural resources and labour. China, for example, is an export-led economy as they have significantly more exports than imports resulting in a high current account surplus. Countries such as Saudi Arabia are an example of a commodity export-led economy, as they have a very prosperous economy thanks to their natural resources of oil.

Countries with these trading goods make up the global market.

The success of a countries exportation trades can be easily assessed by just looking at where the majority of your household appliances and clothes are made, the majority is made in China. Statistics show that out of the top 20 exports countries worldwide in 2017, China ranked first, making $2,263.33.

Statistic: Top 20 export countries worldwide in 2017 (in billion U.S. dollars) | Statista
Find more statistics at Statista

International trade is quintessential in the global economy.  It is a system of co-dependency, where in minutes changes to policies, tariff laws and border laws can negatively affect the interest of a country’s economy.

What does that mean for an EU country like Italy, who are facing economic turmoil?

Giancarlo Giorgetti, a senior government official warned that Italy should not be ignoring their financial situation as the pressure on reserves could lead to a crisis. “The increase in the [bond yield] spread, the amount of public debt banks hold and new European Union banking rules put the industry under pressure and may generate the need to recapitalise the most fragile lenders,” said Giorgetti, who is an influential member of the far-right League, one of the two parties in Italy’s ruling coalition.

The budget plans for Italy’s populist government have caused their investors to shed €67bn ($77bn) of Italian government bonds since May. This is a breach of the EU rules pertaining to borrowing money, which resulted in the decline of the interest rate on government bonds, (referred to as the yield), to more than three percentage points higher than safer German bonds.

Italian banks have bought billions of euros of their own government’s bonds in the past 18 months

In an attempt to raise capital after the blow of a deep recession that left almost a fifth of banks loans redundant, Italian banks have bought billions of euros of their own government’s bonds in the past 18 months. As the improvements started to create some results, lenders were hit by a huge spike in Italy’s debt cost, resulting in a sharp deficit increase that affected their sovereign holdings and capital. As a response, investors have taken flight from Italian bank shares, which trade at a fraction of the value of their assets. Without an alternative to investors, bank chiefs would be left seeking a further bailout from ministers, but the growing uncertainty over Italy’s prospects would make it hard for them to raise capital.

The government asked Brussels to sanction a 2.4% annual spending deficit next year that would increase the country’s total debt to GDP level, which is currently the second highest in the EU behind Greece at 130%. Italy’s sensitive situation has begun to brew fears into other EU countries such as France, Spain, and Portugal. They could be affected by Italy’s predicaments in the banking sector, which has the potential of reigniting a financial crisis across the Eurozone. For many EU countries the departure of the United Kingdom from the EU if not done with a deal that favours both sides, will have a catastrophic blow to the struggling countries.

Generally, the Italian government favour a softer deal on Brexit

Generally, the Italian government favour a softer deal on Brexit. The Italian foreign ministry said that protecting the EU’s budget and the EU’s agencies are their top priorities. The UK is a major contributor to the EU budget, making up 13.5% of the funds. After Brexit, the EU will have considerably less money, as the UK's departure means that EU agencies operating in the UK may not be to continue to work effectively during the transition. Agencies like the European Medicines Agency, are currently based in the UK, and if a no-deal Brexit is in the cards, many agencies will need to move to an EU country once Brexit is finalised in March 2019. This will have significant implications across all European institutions.

Paolo Gentiloni, the former Italian PM, brought up a number of concerns last year when talking to Theresa May. These included protecting citizens’ rights and ensuring that the changes to the UK’s financial services didn't negatively affect Italy. Overall, the opinion of the Italian government will be that it will be easier if the UK wasn’t leaving the EU and that the UK should be encouraged towards a softer Brexit.

On Saturday, Prime Minister Giuseppe Conte said Rome wanted to establish a “constructive dialogue” with the EU over the budget because it recognized the role of European institutions. “The 2.4 percent figure is a ceiling for all the various measures included in the budget, but it’s not a given that all of them can be implemented because there could be technical difficulties,” Giorgetti said. The coalition comprising the League and the anti-establishment 5-Star Movement wants to boost deficit-spending to lower the retirement age and provide a basic income for the poor. According to the Guardian, the rating agency Moody’s had downgraded Italy’s rating to BAA3, its lowest investment grade, from BAA2 in response to the high level of debt and lack of GDP growth. However, the country’s trade surplus and high levels of private savings means that it is unlikely to go bust.”

Italy’s future as argued throughout this article will be heavily affected by the United Kingdom leaving the European Zone. Nevertheless, they still possess a fighting chance all thanks to the private sector, and its ability to invest in government business. What this means for democracy, however, is the real question to ponder.

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