What’s happening in Italy tells us volumes about what’s wrong with the European Union, argues Chris Bambery 

Last week’s defeat in a referendum on the constitution for premier Matteo Renzi, and his subsequent resignation, sent a shock wave across EU ruling circles. In the days since, the reverberations are still felt in Brussels and Berlin. The latter is where the real decisions are made because Germany – ever since it ditched its partnership with France as the joint European power brokers – is the dominant force in the EU.

That was demonstrated on the same day as Italians voted when the German finance minister, Wolfgang Schäuble, ruled out debt relief for Greece. Instead he presented an ultimatium, either Greece implements further austerity measures or quits the Euro: “Athens must finally implement the needed reforms. If Greece wants to stay in the Euro, there is no way around it – in fact completely regardless of the debt level.”

The Greek government argues its debt burden of €330 billion prevents economic growth. The International Monetary Fund agrees and is in favour of debt relief but Schäuble dismissed the idea sayinhg, “that would not help Greece.”

If Greece is living through a 1930s-style recession, the Italian economy faces its own deep problems. In Germany unemployment is 4.1 percent but in Italy it’s 11.6 percent (youth unemployment is 36.4 percent, perhaps explaining why 80 percent of 18-24-year-olds voted No to Renzi).

Germany’s economy rebounded back after the recession that followed the 2008 financial crash. Today Italy’s Gross Domestic Product is still 8 percent below its 2007 figure. The economy has stagnated for 20 years and does not look set to grow anytime soon.

While Germany’s budget is in surplus, Italy’s public debt equals 150 percent of its annual GDP. Its banking sector is in a dire situation, with €360 billion of bad (worthless) debts. Germany and the European Central Bank (the two are essentially the same) blocks a state bailout. EU legislation insists investors in banks are supposed to take a hit through a “bail-in.” One third of Italian bank bonds are held by individuals, and it is they who will take the biggest hit, as happened when a number of smaller Italian banks went bust.

Renzi was trying to piece together the €5 billion that the Monte dei Paschi di Siena bank needs to stave off collapse before the New Year bells toll, trying to get Dubai to cough up a lot of that. This deal has now fallen through.

Italy’s debt and the toxic loans its bank holds are a block to economic growth. Germany’s answer, as in Greece, is more austerity. Renzi promised neoliberal “reforms” and to emulate his hero, Tony Blair, but chose to concentrate on constitutional changes and paid the price.

His replacement as head of government is his loyal ally, Paolo Gentiloni, the former foreign minister. The centre left Democrats, which Renzi still leads, still has a majority, but Gentiloni now has to concentrate on electoral law because Renzi changed the way parliament is elected. He did not change the way the Senate is elected (the referendum would have changed it into an indirectly elected body). The Senate has to accept any new law and Gentiloni has to get a new electoral system past both houses.

If Monte dei Paschi di Siena goes bust it may trigger a wider European banking crisis as investors pile out of European banks. Even if a rescue can be put in place, the wider problem of that €360 billion pile of toxic debt remains. It’s a time bomb ticking away, and banks across Europe hold Italian bank bonds.

On a wider scale, there is growing speculation on the future of the Euro. Italy and other Southern European states are stuck in a Eurozone that demands membership of the Euro and its rules. No account is taken that the Euro’s exchange rate is too high for Italian exporters; Italy is just told by Brussels and Berlin to drive down labour costs by holding down wages and worsening conditions and welfare provision.

Traditionally Italian governments devalued their currency to boost exports, today the can’t. Opinion polls still suggest Italians don’t want to return to the Lira but the mood is shifting against the EU.

So far the media has concentrated on the role of the right, particularly the Five Star movement, in securing a No vote. But the radical left did well in opposing Renzi and getting their message across – from the left of the Democrats to the fragments of the old Rifondazione Communista, from the main trade union federation to the social movements.

The Italian left does not have the visibility of old. The Communist Party of Italy, once the biggest in the West, dissolved in 1991 as the Soviet Union fell apart, the majority jumping rightwards to form the Democrats. The opposition to that move formed Rifondazione, which a decade and a half ago claimed 100,000 members and was at the centre of the popular protests and movements which swept Italy in the first half of the last decade.

Having failed to force out the right-wing government of Silvio Berlusconi, Rifondazione’s leadership then argued he was aiming at creating a “strong state” and that they had ally with the Democrats and others to get him out. Thus Rifondazione became loyal members of a centre-left coalition government, which turned on its own supporters. The result was that Berlusconi returned and Rifondazione fell apart.

But hundreds of thousands still identify with the Communist tradition, particularly that of the war-time resistance. Discontent among the young is evident in the way they voted in the referendum, but the No vote was very much a working-class one. Having got its act together during the referendum campaign, the radical left now needs to take to the streets – there’s no shortgage of issues for it to take up, and the mood for resistance is there.