Will Populists Stall Europe? Italy's New Goverment Is Bad News for the Euro

Two populist parties are set to take over the government reins in Italy and about the only thing they seem to agree on is their desire to spend huge amounts of money. That's bad news for Italian finances and terrible news for the eurozone. By DER SPIEGEL Staff

Luigi Di Maio, head of Italy's Five Star Movement
Angelo Carconi / REX / Shutterstock

Luigi Di Maio, head of Italy's Five Star Movement


Signor Fabio doesn't think it will take long. The new Italian government, he believes, is destined for a brief tenure: "In September, we will be voting again," says the slender man in the center of Rome. Signor Fabio is the giornalaio -- or newsstand proprietor -- with the most attractive kiosk location in the capital, situated as it is fewer than 100 meters from the prime minister's office. He knows what's going on in the world and that people are once again looking to his homeland with concern.

"Rome Opens Its Gates to the Modern Barbarians," was the headline chosen by the Financial Times 10 days ago in an editorial about the new government, which pairs the Five Star Movement (M5S) under the leadership of Luigi Di Maio with the right-wing nationalist party Lega, led by Matteo Salvini. But Italian papers weren't any less critical. The daily Il Manifesto went with the headline "Populandia," in reference to the populist natures of the two parties. "The Third Republic Is Formed as the Whole World Laughs," wrote Il Foglio. And Libero wrote: "Mattarella Chooses the Rotten Apple: Mini-Premier Conte."

The latter is a reference to Salvini's and Di Maio's inability to agree on which of the two should become prime minister, so they chose the completely inexperienced law professor Giuseppe Conte. While he is closely connected to the Five Star Movement, Conte has never held public office -- and now he is being asked to lead Europe's third largest economy, with a population of 60 million people.

This government, the 67th in the last 70 years, is perhaps the most unusual and least experienced of them all. At the top are two populists who are critical of the EU and friendly to Russia, two coalition partners who share few joint political goals and whose supporters hate each other. The one party, Lega, draws the majority of its support from the wealthy north while the other, M5S, has its roots in the comparatively poor south.

"It's like if Germany were governed by Sahra Wagenknecht (from the Left Party) and Alexander Gauland (from the right-wing populist Alternative for Germany)," says Markus Ferber, vice-chair of the Committee on Economic and Monetary Affairs in European Parliament and a member of German Chancellor Angela Merkel's Christian Democrats.

Making the Problems Worse

The difference being, of course, that Italy holds 2.3 trillion euros in sovereign debt, the equivalent of 132 percent of its gross domestic product -- a debt ratio that is only exceeded within the EU by Greece. In addition, the country is still suffering from the consequences of the financial crisis, including high unemployment, particularly among young people, and it is struggling to deal with the strain of the thousands of migrants who are still streaming across the Mediterranean to Italy.

The country has been among the EU's problem children for years. As such, the election victory by the populists is hardly surprising, rather it is the logical consequence of the problems facing the country. But at the same time, it has the potential to make those problems much worse.

To satisfy the desires of their vastly different constituencies, Salvini and Di Maio included tax cuts, a minimum basic income and the retraction of the recently passed pension reform in their coalition agreement. According to the calculations of Carlo Cottarelli, a former director of the Fiscal Affairs Department, these measures will cost at least 109 billion euros per year.

Jörg Krämer, chief economist at Germany's Commerzbank, warns that if the new government pushes through its proposals, the country's budget deficit, which currently stands at 2.3 percent of GDP, would spike to fully 7 percent.

The two parties refer to their coalition agreement as the "Contract for the Government of Change," but in actuality, it is a blueprint for destroying state finances. And the consequences for Europe will be impossible to ignore. "The eurozone is threatened by a new crisis," says Clemens Fuest of the Center for Economic Studies in Munich.

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Concern is particularly high in Brussels, but officials there are avoiding direct criticism for the time being, likely in the hope that things won't ultimately turn out as bad as expected. At an economics conference on Thursday, European Commission Vice President Valdis Dombrovski was asked if the new government's program would comply with the Stability and Growth Pact, one of several questions about Italy. The Latvian looked visibly uncomfortable before finally replying: No, probably not. He added that he is particularly worried about rising risk premiums on the bond markets, a trend that has also affected other weaker eurozone member states. The prospect of countries not acting responsibly when it comes to fiscal policy has consequences, he said. It is important that all member states adhere to the rules that have been agreed to if they are part of the common currency area, he added.

French Economics and Finance Minister Bruno Le Maire is more direct. "If the new government takes the risk of not respecting its commitments on debt and the deficit ... the financial stability of the eurozone will be threatened," he told French broadcaster CNEWS last Sunday.

Death Knell

Indeed, even if the EU and the euro might have been able to withstand Grexit, an Italian departure from the common currency zone would likely be its death knell. Italy's economic output is almost 10 times higher than that of Greece. "Given its systemic importance, the Italian economy is a source of potential spillovers to the rest of the euro area," the EU warns in its most recent set of country-specific recommendations released on Wednesday of this week.

The recommendations, which are issued at regular intervals, recognize the efforts thus far undertaken by Italy to reduce its debt levels, but those efforts were all the product of the previous government. The new powers-that-be in Rome have left no doubt that they intend to focus their attentions elsewhere.

EU laws, says Lega head Salvini, will only be respected in the future if they are beneficial to Italy. And Di Maio of the Five Star Movement adds: "Starting now, the Italians come first and only then the negotiations about the deficit and EU rules."

Giuseppe Conte has been chosen to become Italy's prime minister despite never before having held a public office.
Getty Images

Giuseppe Conte has been chosen to become Italy's prime minister despite never before having held a public office.

That approach is consistent with the intention to appoint 81-year-old economics professor Paolo Savona as economics and finance minister, a man who is considered a fierce critic of the euro. Savona's new book, "Like a Nightmare, Like a Dream," will soon be hitting the shelves. In it, he writes: "The euro is a straightjacket produced in Germany." Berlin, he continues, "hasn't changed its view of its role in Europe since the Nazi era." Membership in the common currency area, Savona writes, "involves fascism without dictatorship and, from an economic perspective, a form of Nazism without militarism."

One wonders whether the aging academic from Sardinia will repeat his verbose criticisms when he sits down with his German counterpart Olaf Scholz at the next European Union summit.

Di Maio's people, of course, are doing their best to assuage fears of megalomaniacal populists driving Italy, a founding member of the EU, over a cliff. "We are in constant contact with the U.S and German embassies and we value complete transparency," says one of Di Maio's closest confidantes.

But such words are cold comfort. The advance of the populists, after all, is coming at a difficult time for the EU. The block is still enjoying solid economic growth, but a potential trade war with the United States is looming and the consequences of Brexit must likewise be overcome. A rekindling of the European trench political warfare that accompanied efforts to save Greece would be devastating.

Exactly that, though, appears to be on the horizon.

In the French elections one year ago, the feared victory of extremist, anti-Europeans did not come to pass. But right-wing populists are nevertheless on the march. They are the most powerful opposition party in Germany, they are part of the government in Austria and now they have joined the Italian government. "Our allies," said Marine Le Pen, the head of the French right-wing party Front National, "are laying the groundwork for the great comeback of nation-states."

'Very Aggressive'

Italy will "become the leader of Europe's populist, anti-establishment movement," says Steve Bannon, Donald Trump's former chief strategist, who is expected in Rome on Sunday. It marks the first time that Brussels will have to contend with an anti-system government in one of the EU's founding countries. Bannon is excited about the triumph of Di Maio and Salvini, who are demanding that sanctions against Russia be wound down. "It's very important for these guys to be very aggressive about confronting Brussels," Bannon told the Washington Post this week.

Such an approach would almost certainly be popular in the country, where only 39 percent of Italians view the EU positively -- not a good sign in what was once the most pro-EU country in the block. Part of the country's frustrations with Brussels stems from the feeling of having been left alone to deal with the Mediterranean migrant crisis. In addition, many voters who have suffered from years of recession see the warnings from Brussels as heavy-handedness.

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