Eurozone Governance in 2016: The Italian Banking Crisis, Fiscal Flexibility and Brexit (Plus Plus Plus)

In 2016, the eurozone grew, unemployment continued to fall and deflationary pressures dissipated. The last-ditch deal in July 2015 to keep Greece in the eurozone stuck and hints of a deal on debt relief emerged. And yet, new and worrying systemic challenges emerged. In Italy, the eurozone’s perennial sick man, efforts to deal with an ongoing banking crisis fell short and Italy’s Prime Minister, Matteo Renzi, resigned after voters rejected proposed reforms to the Italian Senate. EU financial supervisors’ handling of the crisis and their leniency towards troubled German giant, Deutsche Bank, cast doubt on the credibility of European Banking Union. The European Commission controversially cancelled fines against Portugal and Spain over their excessive deficits and Mario Draghi faced criticisms from Germany over the European Central Bank’s unconventional monetary policies. The UK’s referendum vote to leave the European Union (EU) created considerable uncertainty for the eurozone, as did the election of Donald Trump as President of the United States.This contribution takes stock of these and other developments in eurozone governance in 2016. Section I gives an update on the euro crisis, focusing on developments in Greece and Italy. Section II looks at the economic outlook in 2016 and the factors driving the eurozone’s continued economic recovery. Section III explores key developments in eurozone monetary policy. Section IV focuses on financial supervision and EU policy-makers’ response to banking problems in Italy and Germany. Section V turns to economic policy co-ordination and reviews the Commission’s controversial decisions over Portugal and Spain. Section VI offers a eurozone perspective on the UK’s momentous vote to leave the EU and Section VII asks what the Trump Presidency might mean for the euro.