Renzi's fall, Grillo's rise

Nicknamed il Rottamatore (the scrapper), the 42-year-old Renzi, former mayor of Florence, became the youngest person in history to be Italy's Prime Minister in February 2014; younger than Mussolini. By then, the longest recession in Italy's postwar history had ended. However, the Italian economy was a tenth smaller than before the crisis, while unemployment had doubled to over 12 percent since 2007.

Even today, unemployment remains at 11.6 percent, while youth unemployment exceeds 36 percent. The figures are the lowest since 2012, but after two decades of stagnation and half a decade of failing living standards, it's no consolation.

By December 2014, the ratings firm Standards & Poor's lowered Italy's long- and short-term sovereign credit ratings to "BBB-/A-3." Nevertheless, S&P expected Italy's government to implement reforms, and the ECB's monetary policy to support a normalization of inflation. In Italy, that was easier said than done. To achieve change, Renzi needed structural reforms and to implement those reforms, he needed constitutional reforms. Italians were sympathetic to the idea of streamlining politics in the Eurozone's third-largest economy in which a gridlocked legislature and unstable governments sustain a seemingly endless ping-pond between the two chambers of parliament. However, by staking his own political future with the outcome of the referendum, Renzi "politicized" the referendum.

Internationally, Renzi was regarded as social-democratic, progressive by outlook and reformist by inclination. Representing much-needed generational change in the aging Italy, he hoped to reverse the country's decline by launching huge projects, starting with a new electoral law to consolidate political decision-making, reforms in the public administration, and the tax system. In reality, he leaned onto Italy's neoliberal forces, supported eagerly the North Atlantic Treaty Organization (NATO) which leaves many Italians ambivalent and even gave his symbolic vote to Hillary Clinton in the U.S. election, which left him stranded after the Trump triumph – in both Washington and Rome.

All of these forces fueled the support of the M5S, which was launched by Beppe Grillo, a popular comedian and blogger, and Gainroberto Casaleggio, a web strategist, right after the global crisis in 2008-9 and right before the onset of the European sovereign debt crisis in spring 2010. After Casaleggio's death last April, Grillo has led the party with a directorate of five leading members of parliament.

In the U.S. and Western Europe, neoliberal media has labeled M5S "populist." In reality, the party is anti-establishment, environmentalist, anti-globalist and Eurosceptic. Moreover, it sees itself more as a "movement" than a "party" and shuns the traditional left-right paradigm. Indeed, the "five stars" of M5s highlight the role of public water, sustainable transport, sustainable development, right to Internet access and environmentalism. It advocates direct democracy, non-violence and sees degrowth as the issue of the future. Many M5S goals can be seen as reactions to Rome's ruling class, including the "zero-cost politics" (politics is a temporary service, not a money-making machine), no criminal records (to increase transparency) and the no-alliances policy to ensure that M5S can push all of its tenets.

In effect, the reasons for the nightmare scenarios about M5S in the neoliberal media stem mainly from the fact that both Grillo and M5S are no fans of the U.S.-led NATO and have explicitly condemned Western military interventions from the Middle East to South Asia, as well as U.S. intervention in Syria.

Despite wide differences in the political platforms of Europe's radical left and right, the common denominator from France's Marine La Pen to Italy's Grillo and the Spanish Podemos is the critique of NATO, U.S. interventionism in Europe as well as certain respect for Putin's Russia. That's why these parties are habitually criticized by the mainstream media, which tend to rely on neoliberal capital.

Political losses, economic stagnation and banking fears

Despite half a decade of promises of deleveraging, Italy's general government debt is still at 134 percent of the GDP; second-highest in the Eurozone right after Greece, and higher than at the onset of the European debt crisis. Even as Italy is amid a cyclical rebound, its real GDP growth will be around 0.9-1.0 percent in 2016-17.

Without Rome's reduced fiscal burden and the European Central Bank's continued easing, Italy would have to cope with deflation. After all, living standards remain today where they were in the mid-1990s. Yet, in structural terms, this may be as good as it will get. Thanks to aging, slowing productivity and de-industrialization, growth is likely to decelerate to 0.8 percent or less and remain at that level until the mid-2020s. As challenges are about to increase, economic muscle will shrink. This benign scenario does not presume major economic or political destabilization – despite looming challenges in the banking sector.

Since the summer, Renzi has been willing to defy the EU and pump billions of euros into Italy's troubled banking system. As the result of the country's three-year recession and years of stagnation, bad loans restrict the bank's ability to lend, which, weakens government's efforts at rejuvenation and contributes to unease in Brussels. Earlier in the year, Brussels signed off some $170 billion worth of precautionary measures to support Italian banks with short-term liquidity challenges. Yet, it is the pressure on capital that's the greater concern, as evidenced by stress tests in July.

These concerns were particularly associated with Italy's third-largest bank, Banca Monte dei Paschi di Siena (BMPS), which has close ties with Renzi's center-left Democratic Party (PD). While BMPS claimed it had secured underwriters to back a turnaround, the stress tests found the bank to have the greatest challenge out of 51 of Europe's top banks to cover its toxic loans in adverse economic conditions.

In Italy, the inability to cope with a substantial share of non-performing loans (NPLs) in the banking sector may well subdue bank lending, which will keep brakes on consumption and investment.

In summer, the rating agency DBRS placed Italy's last "A" credit rating on review citing uncertainty over the October referendum. DBRS is one of the four major agencies whose rating can be used by the EBS to keep Italy in the top band for collateral requirements for its lending to banks. A downgrade would bring Italy's sovereign rating to BBB, which would raise the cost for Italian banks of using government bonds as collateral for ECB loans.

Recently, the neoliberal Financial Times reported that as many as eight of Italy's troubled banks "risk failing" if Renzi lost the referendum and ensuing market turbulence deters investors from recapitalizing them, citing senior bankers. The timing of the report indicated tacit support for Renzi; the message, in turn, has been well-known in banking circles for quite a long while.

The recent shareholder approval of BMPS's €5 billion recapitalization is an early step to save the bank. But far more is needed, even though the timing could not be more unfavorable.

After the U.K. Brexit referendum, the Trump triumph in the U.S. and the overthrow of the Renzi regime, Italy's banking crisis is contributing to a longer-term destabilization, which is likely to reinforce the fragmentation of Europe. In Washington, that is typically seen as the result of "populism" in Italy or elsewhere in Europe. In contrast, Italian opposition forces tend to argue that much of the country's current economic stagnation and political fragmentation is, at least indirectly, the result of U.S. interventionism.

How Tangentopoli and CIA paved way for Berlusconi – and Renzi

Following the end of the Cold War, Italy's ruling class disintegrated after a nationwide judicial investigation into political corruption in the early 1990s. The Mani Pulite ("clean hands") investigation resulted in the demise of the First Republic and the dissolution of many political parties, even suicides of high-profile politicians and industrialists. At one point, every second member of the Italian Parliament was under indictment. Thanks to corruption charges, more than 400 city and town councils were dissolved. Known as Tangentopoli ("Bribesville"), the corrupt system amounted to an estimated $4 billion, mainly from bribes for large government contracts.

Investigation began to expand in early 1992 when judge Antonio Di Pietro arrested Mario Chiesa, a member of the Italian Socialist Party for a bribe from a cleaning firm. As the party began to distance itself from Chiesa, the latter started to give out information about corruption that implicated the party itself. Soon thereafter, the investigations snowballed. That, in turn, led to the fall of the center-right Christian Democracy, while frustrated Italians turned from moderate parties to far-right Lega Nord (LN). By 1992, investigations began to shake moderate mainstream parties, the government-controlled energy giant ENI and veteran national politicians, including Bettino Craxi who accused judge Di Pietro of having provoked a "false revolution" of investigating only some politicians, while ignoring the opposition parties.

In national politics, the most critical result was the fragmentation of major center-left parties. Like in Brazil today, allegations also emerged about a "soft coup" orchestrated by Italian judicial investigators and the CIA. Among others, U.S. Ambassador Reginald Bartholomew said that, behind the operation, the CIA helped Italian prosecutors to accuse politicians – especially those who did not represent U.S. interests in Italy.

As such, this kind of intervention was not exactly new in Italy. It goes back to the 1970s and 1980s "Years of Lead," when Italy coped with waves of terror attacks and assassinations by neo-fascist terrorists. The latter, in turn, were associated with U.S.-led Operation Gladio; a codename for a clandestine NATO "stay-behind" operation in Italy (and many other Western European countries) during the Cold War, led by the CIA. Leaning on the "strategy of tension," these groups used extremism to foster destabilization, which would lead to demands for "law and order."

The destabilization resulted in the center-right, pro-U.S. Silvio Berlusconi's four governments between the mid-1990s and 2013, until he was convicted of tax-fraud. These two decades also led multiple left-wing and center-left politicians consolidate their combined forces into Renzi's Democratic Party (PD), which was acceptable in Washington. While Berlusconi represented the center-right in Italy, Renzi belongs to center-left. However, neither was a Eurosceptic, both supported U.S.-led globalization, the NATO and military interventions in the Middle East..

Today, times have changed, as Grillo now puts it.

Renzi wanted structural reforms, EU integration and U.S. cooperation. Despite its Euro-skepticism, the M5S supports EU membership, but also national referendum on the euro. Salvini wants political power, exit from the euro and Euro-skeptic cooperation with Russia. Yet, after the Brexit threat, Brussels cannot afford Italexit.

That's a recipe for new uncertainty and volatility from Italy to France and German – all of which will face critical elections next year.

Dr. Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

The commentary was originally released by The European Financial Review on December 7, 2016.