Pity European Union leadership. Today it faces not only Brexit but also a different sort of faceoff with Italy. The latter may well present a greater threat to EU cohesion than the former.
Ostensibly, the battle between Brussels and Rome revolves around the Italian government’s 2019 budget. The still new coalition government in Rome wants to increase Italian government spending 2.7% to accommodate two campaign promises, one made by each of its two members: The left-leaning and populist Five-Star Movement (M5S), led by Luigi Di Maio, promised a kind of universal basic income for the poor. The pro-business and nationalist-leaning League, led by Matteo Salvini, promised tax cuts. While these incongruous policy directions speak to the strange nature of this coalition, it is not the policy mix to which the European Commission objects. Instead, it claims to have rejected the Italian budget on the basis of how it calculates projected deficits. It will, Brussels insists, violate EU rules forbidding any member state from running deficits in excess of 3.0% of its gross domestic product (GDP). Rome has countered with estimates that the deficit for 2019 will come to only 2.4% of Italy’s GDP. Brussels contends, however, that Rome has used much too optimistic growth assumptions.
The reality of this dispute is more complex. On the Italian side, the budget carries a powerful political-economics message. Not only do the parts of the coalition want to deliver on their campaign promises, but they also can see a need in the Italian economy for something other than the budget austerity long dictated by Brussels. They blame past austerity for Italy’s high unemployment rate, verging on 10% of the workforce, and youth unemployment that exceeds 30%. They blame the austerity for the paucity of Italian capital investment and the concomitant threat to productivity growth and the competitiveness of Italian industry. They point to recent months in which industrial production actually declined, albeit at a relatively contained 0.5% at an annual rate. More than this, the new government wants to demonstrate that it will not simply bow to Brussels’ demands as past Italian governments have. Salvini has referred to those previous governments as “puppets.” Di Maio summed up the EU rejection this way: “This is the first Italian budget that the EU doesn’t like. I’m not surprised. It is the first Italian budget written in Rome and not Brussels.”
From the EU side, there must be something more behind the rejection than simply budget accounting and economic growth projections. After all, the European Commission has allowed Germany, France, and Spain to run deficits in excess of the rules. Some economists point to Italy’s already high debt load as the reason why the European Commission took such a strict stand. That debt load ranges close to 130% of Italy’s GDP, greater than any other EU member except Greece at 180%. But this high debt burden has existed for years and the EU has allowed previous Italian governments to run deficits in excess of 3% or GDP, most recently that of Matteo Renzi just before the last election. Against these facts, such claims now hardly offer sufficient reason to reject the national budget of a duly elected, if somewhat strange government. It would seem to have something to do with this particular Italian leadership, probably its defiant attitude. After all the European Commission not only rejected the budget but at the same instance it began to take the virtually unprecedented step of expediting sanctions procedures against Italy.
Whatever has motivated the EU’s leadership in this, the exchange has played into the coalition’s hands. Both parts of the government in Rome from their very different perspectives took an anti-EU stance in the election campaign. Indeed, that position may in fact constitute the only thing these two different parties have in common. They each, one for business and the other for populist reasons, would like to leave the Euro-zone if not the EU or at the very least secure a relaxation in the rules coming out of Brussels. Though fewer Italians express satisfaction with the EU than in most member countries, 44% compared to 66% on average, the government still needs to gin up support for this battle and its anti-EU agenda. Brussels’ typically ham-handed approach would seem well suited to that need. As soon as the Commission rejected the budget, Di Maio went on record with the Italian people in this way: “Considering the damage they did to us first [referring to austerity budgets] we certainly couldn’t continue with their policies.” He added, “We’ll always choose Italians first.” Salvini agreed.
Seen from this perspective, feelings in Italy look similar to those behind the Brexit vote in Britain. In both places, the anti-EU feeling has less to do with economics and trade and more to do with imposition from Brussels and a nation’s ability to choose its own policies. None of this is to suggest that Italy will follow Britain out of the union. However involved Britain is with the rest of Europe, more things tie Italy to its neighbors. Italy’s economy is more thoroughly integrated with the rest of the EU. Italy also has remained a member of the Eurozone from its inception, whereas Britain never joined it. What is more, Italy is a founding member of the union. Britain did not join until the precursor organization to the EU, the European Common Market, had existed for about two decades. The government in Rome must also feel pressure to cooperate as its differences with Brussels have added to its cost of borrowing, raising them to more than 3.3 full percentage points (330 basis points) above comparable rates paid by Germany.
But if Italy’s circumstances make it is less likely than Britain to go its own way, the European Commission owes it to the EU to take a less hostile and less high-handed approach. Having lost its second largest economy in Britain, the EU cannot afford widespread dissention in what is now its third largest economy and a founding member. Italy is too big to bully the way the EU has Greece. Most dangerous for the EU, a break with Italy, even a partial one, would constitute a second major economy to move away from the union.
Originally published on Forbes.com.