Italy’s recovery from the crisis lags even the rest of laggard Europe. Its economy remains 8 percent smaller than in 2007; among EU members, only Greece and Cyprus have done worse.
Top of the list of challenges it faces is bank balance sheets clogged with €360 billion of bad loans, crowding out new lending. Around €40 billion of additional capital is needed to write down nonperforming assets to something approximating market value.
New EU rules, however, designed to limit bailouts and enforce market discipline, stand in the way of the Italian government providing the capital. Since January 2016, banks have been prohibited from taking state funds until their shareholders and creditors have been “bailed in,” bearing losses equivalent to 8 percent of liabilities.
The Italian government is claiming exceptional circumstances—a threat to financial stability owing to Brexit and other blows. There is also the fact that a bail-in would wipe out subordinated debt-holders and some senior debt-holders, an unusually high proportion of which are Italian households. And there is evidence that some of this debt had been mis-sold.
But EU officials, and the EU's biggest creditor nation, aren’t budging. “Germany would be out of its mind to be sharing sovereignty and risk with a country that behaves in this manner,” said one senior European official, calling Italy’s invocation of Brexit “cynical.” Germany’s Iron Chancellor, Angela Merkel, naturally insists Italy must stick to the rules.
Italy’s case for leniency is indeed weak. It has presented no compelling evidence of financial stability threats. And the government could compensate households for losses directly, even though the calculations would be complicated and controversial.
Still, when Prime Minister Matteo Renzi responded to Merkel that he would not “be given a lesson by the schoolteacher,” he had cause to be annoyed. As the left-hand graphic above shows, Germany is, in fact, Europe’s bank-bailout king, having injected €65 billion of state funds since 2008. And even if Italy went forward with the entire €40 billion bailout, its accumulated intervention would still be well below that of Ireland and Spain. Moreover, it would be among the EU’s smallest as a percentage of GDP—as shown in the right-hand figure.
Perhaps Italy’s strongest argument, then, would be that it deserves a one-and-done exception to give it the same tool its fellow member-states have already used—in greater size.