Italian Referendum Call

But in this case the vote would be about Italy's continuing membership of the euro-zone, rather than the EU constitution. Now before going any further, I feel the need to advise extreme caution in the face of such developments.

In the first place the call comes from the Italian Labor Minister - and member of the separatist Liga Del Norte - Robert Maroni: It was made in an interview published by the Italian newspaper La Repubblica. He was not making a statement on behalf of the government, he was in all probability 'electioneering'. (See Fran's post: those politicians).

On the other hand, Berlusconi is pretty vulnerable at the moment, remember he has just put together a new coalition, and elections are coming next year.

Apart from the political dimension, it is important to remember that Italy is now in an economic crisis which is every bit as profound, if not more profound, that that being experienced by Germany.

Quickly summarised Italy's problems are:

* What appears to be enduring economic stagnation
* An outdated economic structure (poor product mix)
* Lack of competitiveness and a deteriorating balance of payments
* A currency which is too high to recover competitiveness
* A rate of interest which may be too high
* An extraordinarily poor productivity performance
* Massive and accelerating public debt (over 100% of GDP and rising)
* Europe's most rapidly ageing population
* A noted aversion for accepting immigrants

I will try and flesh this out a little more calmly over the weekend. But in broad brush strokes this is it. Now, vis-a-vis the euro, it is unsurprising that Maroni should choose today to make this statement, since Economics Commissioner Joaquim Almunia has set June 7th 'D' day for initiating a formal excess deficits procedure against Italy and Portugal. As I indicated before the French vote there is every reason to imagine that the new version of the pact will be strictly enforced (this was emphasised by Almunia's presence at yesterday's ECB press conference), especially after the French and Dutch votes and the need to convince everyone that 'the euro *is* a huge success.

Secondly, the ECB yesterday gave no indication of having any inclination of coming to Italy's assistance by lowering the refinance rate.

So it may well be that some Italian politicians can see that it's 'game over'.

Add to this the fact that some people in Italy were extremely relucltant about the euro even on from first day, and you have all the ingredients of an ongoing problem.

Remember too that with elections coming next year, someone may try and make this an election issue.

Background: The following Country Study From Ecfin (may 2005): Italy Stuck In A Rut

Summary

The Italian economy has shown weak growth ever since the beginning of the 1990s. More recently it has developed two particularly striking, interlinked symptoms: a discouraging performance by exports and the longest stagnation of output in the tradable goods sector in post-war history. In contrast to previous episodes of weak growth, the current difficulties are not caused by supply shocks such as excessive wage increases. On the contrary, the dismal export performance has fallen within a period of wage moderation, and, since the late 1990s, of buoyant employment growth. The persistent loss of export market share would seem to chiefly result from the unfavourable product specialisation of the Italian economy ? more recently coupled with a marked slowdown in productivity growth. Italy?s product specialisation, unlike that of countries such as Germany or France, has not significantly changed over past decades in reaction to global economic developments. Italian industry remains strong in traditional, low-skilled labourintensive sectors for which global demand is growing below average. The inertia is generally attributed to a number of structural factors which are hampering change, including low levels of R&D investment, low human capital, low competition ? issues that fall within the remit of the Lisbon strategy.

Also this weeks NTC Research PMI survey: the sharpest deterioration in 41 months in May,

and the OECD's latest economic outlook for Italy.

That's why when Maroni says "We're already heading towards Argentina, that's why we have to change direction," I'm inclined to believe he is in earnest.