Roman theatre clashes with the EU rule book
The dispute over Italy’s budget risks sparking severe market turmoil
The budget battle between Italy’s government and the EU authorities is intensifying. On Monday the headstrong populists of Rome refused to curtail plans for a rules-busting increase in deficit-financed expenditure. On Tuesday the European Commission, taking a step without precedent in the euro’s 20-year life, demanded that Italy should re-submit its 2019 budget. In coming weeks the two sides must do their best to defuse a confrontation that risks generating dangerous financial market turmoil.
Like many showdowns between Brussels and a eurozone government, the dispute encompasses elements of political theatre as well as principles of economic governance. Yet the theatrics are on display mostly in Rome. There the ruling coalition of anti-establishment mavericks, anti-immigrant rightists and puppet technocrats appears to believe that every artificially manufactured clash with the EU represents a political gain for itself.
In particular, the Five Star Movement and League, the coalition’s dominant parties, have at least one eye on the European Parliament elections in May. They hope that victory for themselves, and for like-minded parties elsewhere in Europe, might lead to the appointment in Brussels of a commission with a very different political complexion and economic policy outlook. Five Star and the League would be off the hook and free to pursue their unorthodox populist visions.
These tactics underestimate the way that investors see deadly serious matters at stake in the budget dispute, starting with the sustainability of Italian public debt and ending with the stability of the eurozone. Matteo Salvini and Luigi Di Maio, the Italian government’s most powerful figures, risk repeating the errors of other eurozone leaders who tried to defy or outsmart the markets. The corridors of Greek power are strewn with the political corpses of such men.
Italian brinkmanship, though misguided, does not justify intransigence on the part of Brussels. As the guardian of the eurozone’s fiscal rule book, the commission has a mandate to hold wayward governments to account. However, it must take care not to play into the Italian populists’ hands by making it seem that a freely and fairly elected government cannot pursue economic policies of its own choice. A balance needs to be struck between, on one hand, the shared responsibilities of all eurozone states to the currency union and, on the other, the right and duty of governments to carry out policies on which they were elected.
Not all the Italian government’s ideas are wrong. The “universal basic income” that is Five Star’s flagship policy is too costly, but it responds to chronic problems such as regional poverty and the shortcomings of Italy’s welfare state. The League’s call for tax cuts has merit, if executed in the right way. By contrast, the government’s proposed rollback of pension reform is a mistake. But let it never be forgotten that these parties won power because Italian voters finally tired of the moderate political and technocratic elites that had presided over a 20-year spell of almost total economic stagnation.
Italy’s woeful record includes high unemployment, a brain drain of talented citizens abroad, squeezed living standards for the millions who remain at home and banks burdened with non-performing loans. The new leaders are entitled to seek change. The problem is that, in their desperation to pull Italy out of the mire, they are governing in a disorderly, unpredictable manner that alarms the markets and gives rise to deep suspicion in Brussels and among fellow eurozone governments.