Brexit will not protect UK from Italian instability, financiers warn

  • Financiers warn on Italy
  • City fears UK is vulnerable to EU instability
  • Calls for more international collaboration

Italy poses a big risk to the stability of Europe, despite the recent ceasefire between the new coalition government and the markets — and Brexit will not protect Britain from the fallout, some of Britain’s top financiers have warned.

Norman Blackwell, chairman of Lloyds and one of the few senior pro-Brexit figures in the City, suggested Italy’s political turmoil could easily recur because of the challenges of maintaining the fiscal discipline necessary for a European single currency.

“Given the weakness of Italy’s underlying financial structures there may well be a point at which these fundamental issues and economic imbalances become impossible to resolve,” Lord Blackwell said. “A financial crisis in the EU will be damaging to us and other developed economies regardless of Brexit.”

The comments were made at the latest monthly debate of the FT City Network, a panel of more than 50 business leaders.

Concern over Italian finances

Paul Drechsler, who chairs the CBI employers’ federation, said Italy was “too big to fail but also too big to be bailed out”, adding: “A financial crisis in the EU would pose a serious risk to the global outlook and the UK would not be immune irrespective of Brexit — our trading and financial links with the EU will be significant since the EU remains the UK’s largest export market by some margin.”

Paul Drechsler: ‘A financial crisis in the EU would pose a serious risk to the global outlook and the UK would not be immune irrespective of Brexit’ © Chris Ratcliffe/Bloomberg

The comments were made as part of a debate on the recent market nervousness triggered by Italy’s political turmoil and the election of a populist coalition with anti-EU credentials.

The spread of Italian 10-year government bond yields over equivalent German Bunds widened to nearly 3 percentage points towards the end of May. Only a month earlier it had been as low as 1.2 points. Reflecting contagion concerns, risk measures in other markets, particularly in the southern eurozone, spiked sharply too. The UK’s FTSE 100 index lost 3 per cent of its value in the last week of May as Italian jitters peaked.

Italian bond spreads remain at a relatively wide 2.3 points. The ongoing nervousness echoes the broader eurozone crisis of 2010-12 when several countries sought bailout assistance from the EU and the International Monetary Fund.

Echoes of the eurozone crisis

Greece was the hardest hit during that period and in 2012 flirted with “Grexit” as popular resentment at EU demands for labour market and pension reforms grew.

David Morgan, the London-based financier who heads the European and Asian operations of private equity firm JC Flowers, said Italy’s new government was also likely to be hostile to the idea of imposing the structural reforms necessary to stabilise the country’s position within the eurozone.

That meant pulling out of the euro was a plausible alternative. “The euro currency union in its current structure is unsustainable in the longer term,” Mr Morgan argued in the debate. “But the transition from the existing structure to one involving the exit of its third largest member is a leap into the dark of prodigious proportions. It could involve massive economic disruption. Brexit or no Brexit, the UK economy would inevitably feel the adverse effects of such major disruption.”

James Bardrick, who heads the UK business of Citigroup, said Italy’s woes would “add to the chorus of hard Brexiteers repeating their cry to abandon a sinking ship”, although he forecast that events in Italy “may steel the EU27 to be less tolerant of populism and less willing to do a flexible or special [Brexit] deal with the UK”.

The need for collaboration

Others in the City Network focused on the need for continued international collaboration. Italy’s backlash against austerity and the EU straitjacket reflected widely held opposition to established liberal views across the western world, said Shriti Vadera, the former Labour minister who now chairs Santander UK.

“The answer to globally shared problems with national twists is not to take false comfort in a retreat into borders but stronger engagement in international co-operation,” she said. “What else does global Britain mean?”

Shriti Vadera: ‘The UK should remember that a successful EU is good for the UK, in or out. Leaving the EU does not protect us from any potential turmoil’ © Charlie Bibby/FT

Europe’s fondness for “ponderous pragmatic compromises” made resolution of the Italian problem tricky, Baroness Vadera admitted. But she paraphrased George Soros who recently warned of an “existential crisis” as well as “another major financial crisis” in the absence of radical EU reforms. “Perhaps it is time for a multi-track instead of a multi-speed Europe.”

The most positive and pro-European contributions to the debate came from Mike Rake, the former BT chairman who has also been president of the CBI. The EU had been a “huge success”, Sir Mike said, with the world’s largest single market benefiting the spectrum of the UK economy, from financial services to car manufacturing.

“The UK should remember that a successful EU is good for the UK, in or out. Leaving the EU does not protect us from any potential turmoil. To the contrary. We are an important pragmatic influence for reform.”

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