The election that took place in Italy in March this year presented a major problem for the European Union. The country’s two populist parties, the anti-establishment Five Star Movement (M5S), and the anti-migrant League, announced a joint agreement naming Giuseppe Conte, 53, a lawyer and M5S member, as the next leader of the eurozone’s third largest economy, after Matteo Salvini of the League, and Luigi Di Maio, of the M5S, ruled themselves out.
It’s considered to be a slightly bizarre combination of parties as one could not find two parties that are so widely divergent. However, a common enemy can unite even the oldest of foes and the EU appears to be that foe.
The reality is that the euro left Italy in a state of almost permanent stagnation since 1999. Although it is the third largest economy in the eurozone, its workers are simply not going to be as productive as Germany workers. There has been a high human cost to joining the euro; with high levels of unemployment and struggling businesses.
The result has been that the major players in this new Italian Government, who have labelled the euro as a “bad currency” and “destined to fail”, have campaigned on a platform of providing benefits to Italians, reducing taxes and taking back control of their economy.
As the government begins to take shape, its program seems to combine high-spending but low-tax ambitions, which although are philosophically opposed, are aimed at healing the wounds left by the eurozone.
This new agenda will require a surge of public borrowing. The partners are undaunted by Italy’s current debt burden (130 percent of gross domestic product) and seem to be downright inspired by the EU’s rules on fiscal consolidation. Their program doesn’t just break those rules; it laughs at them.
The ideas themselves are not necessarily economically intelligent; it’s unlikely that anyone will lend money to the Italians so they can implement this strategy and the economy is so enormous that a bailout seems ludicrous.
However, from a political perspective these ideas could work for the new government and could spell catastrophe for the EU. This is because the EU is unlikely to give this new strategy any legs at all. The result will be that long before financial markets and economic realities sink in, the German Finance Ministry and the European Commission will simply tell Italy that they cannot implement these policies because the eurozone has strict rules against large budget deficits.
In other words, a democratically elected government in Italy will be told by the powers-that-be in Brussels that it cannot implement the reforms that the people in Italy have been asking for, which include wider social and monetary benefits. This tension has the potential to be a positively electric situation for a country that already is holding such animosity towards Brussels.
William Hague, the former Foreign Secretary of the United Kingdom has summarised this aptly by saying:
“If the new political leaders want to trigger the bust-up that could lead to Italy leaving the euro, as so much earlier rhetoric from them has suggested they do, the stage will be perfectly set for it.”
Although its unlikely Italy will leave the EU in the immediate future, it has potential to extract itself in an almost explosive manner and it has the democratic mandate to do so.
This tension also poses a wider question on the benefits of the euro; it would seem it hasn’t been wise to combine such different economies, with long, independent histories formed on completely divergent cultures within one single currency.