The Italian National Cabinet 

Dear Delegates,

It is my pleasure to welcome you to YMGE and the National Cabinet of Italy! My name is Andrew Sady-Kennedy and I am humbled by this opportunity to serve as your Committee Director. I cannot wait to hear the exciting discussion, debate, and compromise that will make our committee so dynamic and inspiring, as well as the intricate solutions that will be proposed to address the European crises.

First, I’d like to share a little bit about myself. Originally from Ladera Ranch, California, I’m a sophomore in Ezra Stiles College at Yale. I joined the Yale International Relations Association (YIRA) during my freshman year at Yale, and since then, have chaired many conferences, both on campus and abroad. In addition to serving as a Director for YMGE, I have served on the Secretariats for YMGE and Yale Model United Nations, as well as a Crisis Director for the Security Council Simulation at Yale. Outside of YIRA, I am on the Division I Yale Bulldogs Men’s Soccer team, an active member of the Club of Argentine Students at Yale –culturally, my paternal Argentine heritage has played a vital role in my life– as well as being enrolled in Yale’s Directed Studies, a scholarly humanities program designed to challenge and expand the minds of each student by exposing us to the seminal texts of Western civilization. After completion of this program, I will pursue the Global Affairs major.

My past Model UN experience consists of being a chair, a member of the Secretariat, and last, but not least, a delegate. I have participated in conferences since my sophomore year of high school and understand that each new experience brings about a different challenge. I hope you are ready to engage in an adventure full of excitement, confusion, and collaboration because YMGE will encompass all of these emotions and feelings into one platform based on crisis. Much will be asked of you when dealing with these crises, but you can be assured that I will be there to help you address any concerns that may arise in the search to find a solution to the issues taking place within the National Cabinet of Italy, but also within the entirety of Europe throughout the crisis mode. I consider my role especially important in helping all of you understand and continue to grow within your knowledge in international relations, diplomacy, and working together in an efficient manner to solve crises. To achieve this, it is of vital importance for you to come to the committee ready to engage in the fast-paced debate, embrace the unforeseen challenges, and develop your skills as a public speaker. By the end of the conference, I hope all of you will emerge with new knowledge on the issues within Italy, Europe in general, and a foundation in critical thinking skills that will help you attack issues all over the world in the future.

I’m excited to meet all of you this November and encourage you to utilize this topic guide and reach out to me if you have any questions about the committee, the topic, the conference itself, Yale, or anything else that you would like to know. Please don’t hesitate to contact me before the conference at tyler.sady-kennedy@yale.edu.

Sincerely,

Andrew Sady-Kennedy

The Council of Ministers (Consiglio dei Ministri in Italian), established in 1848 by the Kingdom of Sardinia, under the Albertine Statute, is the principal branch of the Government of Italy holding the executive power. This Statute later became the model for which the Constitution was based upon and implemented by the Italian state. In its commencement, it was a method by which to recognize the existence of ministers more than to conduct actual meetings and collaborate amongst themselves. As the years went by, and with the need for collaboration between the ministers, a President of the Council was added to delegate and supervise activities.

The Council of Ministers consists of the President of the Council – the Prime Minister – the Under Secretary to the Prime Minister, and eighteen ministers in different sectors of the economy. The Prime Minister is appointed by the President of Italy and confirmed by both houses of Parliament. The ministers, on the other hand, are appointed by the President of Italy with the recommendation of the Prime Minister. Because the activity of the Council is influenced by the individual ministers and the political parties that each represents, the Prime Minister takes on the important role of mediating between the parties.

Although it is the role of the President of Italy to appoint ministers, he is not allowed to remove them regardless of any wrongdoing. In order to remain in power, the Council of Ministers must maintain a “relationship of trust” with the Parliament which means that they must hold the support of both houses throughout their term. Beginning in 1985, the procedural rules for removing a minister were implemented so that the Parliament could propose a vote of no confidence and remove any single minister from their post. To date, this phenomenon has not occurred since ministers have resigned before reaching this instance. In theory, the Prime Minister holds more power than the President since he presides over the most important sector of the government; however, his position depends upon the Parliament who can remove him at any given time.

Currently, the Council consists of 13 ministers with portfolio and 5 without in addition to the Prime Minister and Undersecretary of the Council. Ministers without portfolio are those who possess the same status as those with portfolio yet they do not lead an independent ministry. At the current time, these sectors are: Parliamentary Relations, Simplification of Public Administration, Regional Affairs, Territorial Cohesiveness & South Italy, and Sport Affairs, the final two being implemented during Paolo Gentiloni’s term.

The Council has three primary roles which include: legislative initiative, decree power, and regulatory power. The legislative initiative signifies that the Council is authorized to present bills to the two chambers of Parliament for review. The decree power refers to decree law and legislative decree. The former is used in cases of urgency and the latter in cases where Parliament has delegated legislative authority to the Council. Regulatory power refers to the ministers acting in the administrative roles of the State in which they enact regulations to later implement into legislation having the power to sign ministerial decrees within their specific authority.

Early History

Italian banking finds its origins in the medieval era and the early Renaissance. Banking specifically began in the wealthier cities of the north, such as Florence, Siena, Venice, and Genoa. One example of this historic banking tradition is the Banca Monte dei Paschi di Siena, which was founded in 1472, and is the oldest surviving bank in the world.

Establishment of a National Bank

Italy’s national unification in 1861 finally bridged the economic gap that existed between Italy and the other leading European nations. The initial banking system was constituted of a few, small individual banks; however, large-scale bank circulation was relatively scarce. Most of the banks in existence had been created before the unification of the country, either lasting from the medieval and early Renaissance periods or from the first half of the nineteenth century before unification. A single currency was created in the form of the Italian lira (Pepoli Law of 1862), which would be replaced by the euro in 1999. However, circulation proved troublesome because the individual banks continued to issue their own banknotes, as opposed to merging into one. Each bank issued its own lira banknotes, and stimulated competition between banks.

Most of the banks that existed at the time were banks of issue, or banks empowered by the government to issue currency. A law was enacted in 1874 on banknote issuance in Italy to authorize only six institutions the unique ability to issue banknotes. The only reason a large central bank had not been created was because the individual regions and states in Italy would not concede their local power. Because bank deposits were rare, lending was only possible through these banks that issued banknotes. Beginning in the 1870’s, non-issuing banks, the modern banks, were founded. The banks of issue, however, by discounting bills, helped production and investment in the stimulation of the Italian economy.

Bank crises in Italy arose before today’s situation. In the 1880’s, the foundation of the new national capital, Rome, sparked massive investments in building enterprises. Foreign investment also led to the problem of overexpansion. This led to the banking crisis of the 1890’s, which apart from being a large economic scandal, highlighted the political turmoil within the country. Prime Minister Giovanni Giolitti’s ideas for reform were accepted as a way to end the crisis. A new law in 1893 established the Bank of Italy, merging three other banks together: Banca Nazionale, and the two Tuscan banks.

Modern Banking and the Euro

Italy began to achieve sustained economic growth in the 1950’s . International investment opportunities arose, which led to the establishment of competition in the economic system. In The foundation of the European Economic Community in 1957 and the convertibility of the lira into other currencies in 1958 both had a large effect on the growth of the Italian economy. Furthermore, about twenty years later in 1978, Italy agreed to create the European Monetary System. Its main achievement was to prevent large exchange rates between different European currencies.

The Single European Act of 1987 set a timetable for the merging of the individual European economies into one larger economy. Then, in 1992, the Maastricht Treaty created the European Union and the foundation of the euro as a single currency throughout Europe. Both of these acts strengthened the Italian economy and integrated it into the larger European influence. However, the transition to a single currency was particularly difficult in Italy, since the lira lost around 20 percent of its value. Throughout the 1990’s, Italy’s banks began to counteract this depreciation in the lira and set themselves up to be one of the initial countries in Europe to utilize the euro as the single currency in 1999.

Question to Consider: Once understanding a thorough history of banking in Italy, what is the larger significance of the euro on Italy’s modern banking system? Could the euro’s power all over Europe be one of the factors that led to the banking crisis?

Case Study: Greek Government-Debt Crisis

Greece never truly recovered from the global financial crisis of 2007 and 2008. Over speculation after the crisis led to Greece’s own crisis in 2009. Unable to handle the crisis on its own, the first program to help Greece proposed a bailout in 2010, receiving €80 billion from the European Central Bank and €30 billion from the International Monetary Fund. Still struggling in 2012, a second program was created in which Greece received another €164 billion until the end of 2014. The most recent bailout occurred in 2015, in the third stability support program for Greece. Receiving around €10 billion, Greece partook in a last-ditch effort of assistance from its fellow European nations. This was facilitated by the creation of the European Stability Mechanism, which established an official platform for European nations to help each other when one individual country experiences a tough financial situation. According to the European Commission, “Greece’s stability support program aims to support the Greek government’s efforts to: address economic imbalances, tackle social challenges, and pave the way for sustainable growth and job creation.” The European Union and the International Monetary Fund are torn over whether they should continue to fund a bankrupt Greece. Could a similar situation occur in Italy if the Council of Ministers and Parliament do not act soon?

Question to Consider: Will Italy receive the support that Greece received early on in the crisis? How does the European Union play a massive role in salvaging Italy’s banking crisis? Could the European community be more hesitant to aid Italy after the failure of Greece?

Key Points

- Italian banking has one of the longest history’s in Europe and was one of the forerunners in creating the economic institutions of the European Union;

- In Greece, we have seen the troubles one nation endured in the effort to end its debt and banking crisis;

- It will be important to evaluate Italy’s past and present to dictate Italy’s future.

Introduction

Italy’s current banking crisis indicates that a possible repeat of the financial bailouts that were necessary in Greece. Italy, as the third largest economy in Europe, is experiencing major financial difficulties. Around 115 of the 500 major banks in Italy are experiencing dire financial liquidity. Some of these are smaller banks which do not largely affect the large-scale situation. But the largest banks, such as Monte dei Paschi di Siena, can bring the country to ruin if they cannot resolve their balance sheets. Veneto Banca and Banco Popolare di Vicenza are considered smaller banks that have a large influence on the precedent set for larger banks. The debt crisis of the smaller banks should not cause major disturbances in the country and can likely be before deciding the budget order to make it through the German elections of September 2017. The Italian Parliament and Prime Minister Paolo Gentiloni approved €20 billion in December 2016 to save one of the largest banks, Monte dei Paschi di Siena. The Parliament dispersed these funds with the belief that it will allow banks to lend, boost investment, and spending. Since the early 2000’s, there has been relatively little economic growth within Italy. As such, it is no surprise that the situation has reached this level. Investors are maintaining their distance from Italian assets, which results negatively on the euro’s value. While Italy wants to resolve the situation for the benefit of the taxpayers, the EU prefers that the depositors pay the debt. If the EU does not allow the Italian government to protect their investors, there is a strong possibility that nationalist parties, such as the Five Star Movement and North League, will become popular, promising a Brexit-style referendum, in Italy’s 2018 elections.

Question to Consider: If Italy’s banks continue to fall into debt, will the populism seen in France’s National Front, with Marine Le Pen, possibly emerge within the country?

As seen in the graph and the table, Italy’s GDP has consistently been below the EU average which on its face is not a troubling factor; however, the decreasing GDP does wave a warning flag. The table showing employment trends above to the right indicates that Italy could be the new Greece as it is reaching a 45% unemployment rate. The banking crisis affects the entirety of the nation, as seen by the lower GDP and employment rates.

Key Points

- Italian banks, both small and large, are troubled and continue to struggle even after receiving financial help from Parliament;

- The European Union refuses to bailout any large banks within the country until after the September 2017 German elections;

- Populist movements could rise during this banking crisis and run for office in the next election.

Larger Bank: Monte dei Paschi di Siena’s Dilemma

The Italian government may have to find a way to keep Monte dei Paschi di Siena alive after the European Central Bank (ECB) refused to give the bank a bailout and strengthen its position in December of 2016. Because the bank is experiencing a lack of investors, the ECB’s refusal to assist the bank in a restructuring of its debt essentially blocks off any private sector solutions. This also places more pressure on the Italian government to initiate a recapitalization –major changes in the bank’s capital structure of funding– of the bank. If the Italian government were to embark on this venture, investors would experience asset losses. Monte dei Paschi di Siena’s crisis also struggled in the past year with the changes in government. Ex-Prime Minister Matteo Renzi’s resignation in December 2016 prompted further confusion and misunderstanding in regards to handling the banking crisis The bank itself publicly declared that it failed to raise enough money from investors to keep its door open. Current Prime Minister, Paolo Gentiloni, must attempt to fix the crisis at Monte dei Paschi di Siena, as well as all other Italian banks. Gentiloni has to decide if it is in the nation’s best interest to subject the bank’s bondholders to losses. One of his first actions as Prime Minister, in late December of 2016, was to fund the bank with €20 billion in order to make up for the bank’s inability to raise at least €5 billion from investors. However, the political uncertainty of the new Prime Minister created an additional barrier to potential private investors at the bank. A bank stress test has named Monte dei Paschi di Siena the “weakest” economic performer out of 51 of the major banks in the world. Gentiloni and the Minister of Economy and Finances, Pier Carlo Padoan, agree that the €20 billion should be more than enough to save the bank and meet its capital needs.

Question to Consider: How does Monte dei Paschi di Siena, as one of the larger banks, differ from the smaller banks who undergo debt? Why does the size of the bank matter in the scope of the crisis as a whole?

Here is a graph from April to August of 2016 showing the change in Monte dei Paschi di Siena’s share price. As can be seen on the graph, the bank’s share price continually rises throughout April; however, moving towards August, it gradually begins to drop until it hits a share price of 0.2688 euros.

Key Points

- Monte dei Paschi di Siena received the weakest score on the EU-wide stress level test of 2016, indicating its imminent debt crisis;

- Prime Minister change from Matteo Renzi to Paolo Gentiloni brings uncertainty into the situation;

- Gentiloni issued €20 billion to fund the bank’s financial crisis, and thus far, it has not sparked hope in investors’ re-evaluation of their money.

Smaller Banks: Veneto Banca and Banco Popolare di Vicenza Crisis

Although they do not have the same effect as larger banks, the smaller banks in debt, such as Veneto Banca and Banco Popolare di Vicenza, demonstrate that there is a much bigger banking crisis affecting the nation. In April of 2017, the former is seeing losses of €1.5 billion, while the latter has experienced losses of €2 billion. The way in which these smaller banks react to the crisis is an indicator of how the larger banks, like Monte dei Paschi di Siena, will approach the same situation. Investor’s reactions to evaluate their assets in these smaller banks is demonstrative of future re-evaluations in the larger banks, which will affect the entire country. Banco Popolare di Vicenza has been experiencing major outflows in 2016, leading into 2017, because investors are far from having confidence with the state of the banks. Heavy losses and a reduction in consumer deposits indicate that these smaller banks are in very dangerous positions as they await the approval of the EU bailout. In the meantime, private-funded banking industry Atlante has issued €3.4 billion to the two banks to help them make up for their losses in 2016. While these smaller banks depend upon the EU bailout to seal their fate, Italy must act to try and save banks from the bottom up.

In the table above, the last column shows the Texas Ratio for different banks in Italy. A Texas Ratio above 100 indicates that the bank is struggling financially. As can be seen, the two smaller banks of Banco Popolare di Vicenza and Veneto Banca have the worst ratio’s, other than Monte dei Paschi di Siena, at 210.9% and 225.7% respectively.

Key Points

- Smaller banks, like Veneto Banca and Popolare di Vicenza, will set a precedent for how larger banks and investors will act in the midst of the crisis;

- Both smaller banks nearly went bankrupt in 2016; however, Atlante came to the rescue to keep them afloat;

- These institutions await an EU bailout to ease the financial crisis in Italy.

Is Italy the new Greece? Is it possible Italy could follow Britain out of the EU?

Italy’s major concern is the €360 billion nonperforming loans that have accumulated over time since the financial crisis of 2008 until 2016. This accounts for almost 20% of the nation’s loans. Many Eurozone nations have been experiencing financial troubles and if Italy falls into the trap of not saving itself from the banking crisis, this domino effect could continue. The euro may be able to survive a Greek exit, but if Italy’s banking crisis gets worse, it may devolve into a large-scale calamity for the entirety of Europe. Italy’s economy, as the third-largest in Europe, is about ten times the size of the Greek economy. Furthermore, as an instrumental nation within the EU, Italy’s financial downfall could cause not only a Eurozone crash but a world disaster. This crisis may devolve into an argument between Italy and the strongest nations within the EU. Germany, as the informal leader of the EU, opposes bailouts to individual nations. For this reason, Italy must resolve the banking crisis on its own for the time being. Populist parties are on the rise and their growth is only strengthened by an economically-struggling nation. Italy, if not helped by the EU, may follow Britain out.

Question to Consider: If the European Union refuses to bailout Italy’s banks even after the German election, how will the Council of Ministers react? What actions will Italy take as a sovereign nation without the support of the EU?

Italy’s nonperforming loans have increased steadily since the financial recession of 2008. The graph above shows that these loans have increased relatively equal between overdue loans, restructured loans, substandard loans, and impaired loans.

Key Points

- Italy’s nonperforming loans continue to increase the largest bank’s debts;

- The Italian banking crisis will have even worse effects on the entire world because of the size of the Italian economy

- If not respected by the EU, Italy may follow Britain in leaving the Eurozone

Party Influence

The Council of Ministers is very susceptible to party influence. Since the ministers in the Council are appointed by the President, the governing majority has some influence upon those chosen. Currently, Sergio Mattarella, the President of Italy, hails from the ranks of the Democratic Party. Prime Minister Paolo Gentiloni, the head of the Council, is also from the Democratic Party, along with his Under Secretary, Maria Elena Boschi. Of the other eighteen appointed ministers, twelve represent the Democratic Party. Three ministers represent the Popular Alternative, one minister identifies with the Centrists for Italy, and two ministers are Independents. Although it is the Prime Minister’s job to negotiate between all ministers and parties equally, sometimes members of the same party will bloc together.

Minister Purpose Influence

Besides party influence, the individual ministers also have their own agendas. For example, the Minister of Economy and Finance, currently Pier Carlo Padoan, supported the funding of banks that were inundated with major debt. Because the banking crisis affects all sectors of society, most ministers agree with Pier Padoan’s recent actions in December of 2016, alongside Paolo Gentiloni. However, certain ministers, like the Minister of the Interior, Marco Minniti, could propose their own viewpoints into the situation. Marco could instead ask that the funds be delegated to improving internal security measures to ensure the protection of the nation. Depending on the gravity of the situation, ministers can evaluate the amount of support they believe is necessary in certain sectors. For the purpose of the banking crisis, if ministers believe that there is a more prominent issue within Italy that revolves around their sector of ministry, they would argue for the funding support to that problem. It may even be the case that certain ministers might want to see the collapse occur, as that could help improve attention to their respective sectors. It must be duly noted that the banking crisis is one of the most important issues plaguing not only Italy, but all of Europe. For this reason, most ministers have not formed many blocs together.

Please continue your research on the Italian banking crisis by keeping up to date with credible news sources. Your current knowledge of the crisis will be the most important asset for you during the committee sessions. In the writing of this guide, for example, I came upon a recent article by Reuters on the struggling banks in Italy. The Economist and the Guardian have also come out with many helpful articles on the crisis. Here is one from the Guardian depicting UniCredit trying to revitalize itself as a credible bank. It may be helpful to research Italian news sources more in depth, as they will likely have more daily information on the banking crisis and the actions taken by the Council of Ministers. Corriere della Sera, one of the most circulated news sources in Italy, recently released an article involving Maria Elena Boschi, the Under Secretary of the Prime Minister.

Aside from current new sources, it is also important to first try and familiarize yourself with the Italian government system, which can be done on the website of the Ministry of Foreign Affairs of Italy. Please research more recent information within the last 10 years of the Italian economy. Researching more about the internal government structure and the current history of the economy will ensure your success in dealing with the current banking crisis. In depth research on your minister will also be necessary and it might be difficult to find pages dedicated to each individual minister, but you may be able to start on Italian government’s official website for the Council of Ministers. This page will have the most up-to date news on the activity of the Council itself and show which ministers are most active in searching for solutions to the issues in Italy.

When writing your position papers, please be conscious of your minister’s position on crucial topics. What does he or she consider to be the most vital areas of concern within Italy? Is the banking crisis his or her priority? These are the questions you must consider and fully understand when taking your minister’s position, as it will be vital to represent each minister according to their true position. Again, if you have any questions at all about the topic guide or your further research, please feel free to reach out to me. I wish you all the best in this process!