Lose-lose

Berlin and Brussels can’t cope with Italy’s budgetary blackmail

Le Pen besucht Italien
An offer you cannot refuse. Source: DPA

Chancellor Angela Merkel and Finance Minister Olaf Scholz are doing their best to distance themselves from the row over Italy’s debt. Ms. Merkel recently pointed out that it was up to the European Commission to handle the matter because it was responsible for monitoring Italy’s budget plans. And Mr. Scholz stressed that no one could relieve Italy of its debt burden and one shouldn’t pretend this was a European problem.

But that’s precisely what this willful breach of the rules by the coalition of League and Five Star Movement amounts to: an inherently European problem. Rome’s populists are seeking a confrontation with the weakened EU which has nothing to gain from the row.

That’s become evident from hostile correspondence between Brussels and Rome. Last week, European Economic Affairs Commissioner Pierre Moscovici informed the Italian government that its budget plans breached the Stability and Growth Pact to an unprecedented degree. The Italian coalition wants to increase the 2019 budget deficit to 2.4 percent of GDP next year, three times more than initially targeted by the previous government, and it’s doing so not to aid structural economic reforms but to bankroll election promises. On Monday, Italy’s terse response arrived in Brussels. The changes were a “hard, but necessary decision.”

Fiscal harakiri

Brussels is stuck between a rock and a hard place. It can try to find a compromise with the Italian government to allow a higher level of debt, but not quite as high as Rome is demanding. But that would be a sign that it pays to hold the EU to ransom: if you demand to run up three times as much debt as agreed, you’ll end up with twice as much. Alternatively, the European Commission can adopt a tough line, reject the draft budget and launch an excessive deficit procedure against Italy.

There are no prizes for guessing how the anti-European populists will respond. Interior Minister Matteo Salvini, the leader of the League, has made clear his country will not allow itself to be dictated to by Paris, Brussels or Berlin. That explains why Mr. Scholz is insisting this isn’t a European problem. He knows the populists in Rome are waiting for the German finance minister to wag his finger and demand budget discipline. They’d love to fan the flames and show their compatriots that they won’t accept the supposed dictatorship of Brussels and Berlin.

But Mr. Scholz’s strategy, while understandable, can’t work indefinitely. For the time being, the euro member states can hide behind the European Commission and let it handle the hostilities, but the time will come when they will have to show their colors — formally, because they’ll have to decide on possible penalties on Italy for breaking the deficit rules, but also fundamentally, because Italy’s economy is the third biggest in the euro zone and is sitting on a debt mountain of 130 percent of GDP. When Italy starts committing fiscal harakiri, it puts the entire euro zone at risk.

Political blackmail

Italy is too big to fail, economically and politically. If the smaller Greece was able to plunge the euro zone into an existential crisis, it doesn’t bear thinking about what damage Italy could cause if it ran into serious financial difficulties. The euro zone’s bailout fund, the European Stability Mechanism, isn’t big enough to cope with Italy, at least not without help from the European Central Bank which could ill afford to intervene given its poor record on helping Italy so far. The ECB has been keeping interest rates low for years but successive governments in Rome haven’t used that leeway to enact enough necessary reforms. Seizing on ECB President Mario Draghi’s pledge to keep the euro zone together “whatever it takes,” the populist coalition has concocted a “whatever we want” strategy that rides roughshod over the rest of the euro zone.

There’s ample scope for political blackmail in addition to the economic blackmail that’s going on. Europe urgently needs to show a united front right now because it faces external challenges from Donald Trump, China and Russia. But Mr. Salvini’s flirts with Moscow are a threat to the rest of Europe. Rome is pondering out loud whether to agree to prolonging the sanctions against Russia.

The Italian government’s conduct is weakening an already weak EU. Worse, it’s thwarting every attempt to strengthen the bloc. At the very least, it’s making a decision on far-reaching reforms of the euro zone in December less likely. Every fresh breach of the rules by Rome lessens the political willingness of many euro zone countries to take further steps towards European integration. That’s another reason why Italy is very much Europe’s problem.

To contact the author: hildebrand@handelsblatt.com

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