Italy in the eurozone crisis

The European Commission, for the first time, rejected a draft national budget, threatening the opening of a "procedure" against the Italian government. The prospects for possible fundamental changes in the Eurozone.

Apparently, the fight taken on by the European Commission against the Italian government makes no sense. The argument is about the level of the budget deficit for the next year. In the past, it seemed that the Commission could accept a deficit of 1.9 percent of the GDP. This has not been the case. The final budget plan presented by the Italian government envisages a deficit of 2.4 percent of economic output.

The deficit issue
There is an explanation. About a third of this forecasted deficit is required to neutralize the increase of TVA, an old constraint imposed by the past governments and inherited by the new one. Approximately, another third of the deficit is earmarked as an economic provision - the universal citizen’s minimum revenue - for people living in extreme poverty, with the condition that they take at least one of three job offers from employment services. Almost another third to the pension reform, allowing people aged 62 years with 38 years of contributions to be able to access their pension – a provision also aimed to improve the chances of finding a job for as many as half a million unemployed youths. It is worth remembering that the majority of  European countries have a comparable flexibility with respect to the pension system.

Why, for the first time in  EU  history, has the European Commission rejected the Italian budget plan, threatening to open an infraction procedure, and to impose relative sanctions in the case of non-compliance? The explanation given by Mr. Moscovici, the EU commissioner for economic affairs, was officially clear and at the same time devoid of sense.  In fact, according to Pierre Moscovici, the European Commission isn’t interested in the content of the budget, but with respecting the rules which require the elimination of the budget deficit.

It has to be remembered that no country, except Germany, has achieved this objective in the past years. And even now the French government has announced an increase in the deficit to 2.8 percent of GDP in 2019.

The menacing Commission
So, what is the reason for this never before imposed rigidity? Even though paradoxical, the very explanation is in Moscovici’s argument: that is, a eurozone member state cannot autonomously decide on its fiscal budget.  In other words, the main issues of the platform for which the government has been formed have to be canceled. That is to say, that the vote is a futile exercise - a  waste of time in an empty democratic regime.

According to the editorial comment from the Financial Times,  “the intransigence on the part of Brussels” is not justified: “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…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. ...The new leaders are entitled to seek change (Roman theatre clashes with the EU rule book,24.October, 2018).

But what is the real issue in Brussels’attack? It is hardly about some decimal points in the deficit. The reason has to be found in the Eurozone crises.  If the Italian government is allowed to comply with its own program, many other countries could follow its example and claim their sovereignty in a framework which properly mediates national political autonomy with freely adopted European commitments.

Rise and decline of European social democracy 
Next spring, the commission will reach the end of its term. The campaign to elect the new European Parliament, and subsequently the new commission will start. The composition of the new Parliament is going to be radically changed. The number of parties that no longer support the Eurozone’s bankruptcy policy is growing in all countries. If the new Italian government, based on an unorthodox majority, could defy the European authorities, it would set a strong example for other political forces that oppose the eurozone policy.

Indeed, a new European perspective is developing. The main point is the ongoing dissolution of the center-left parties.  All the recent electoral results move in this direction. The last cases are those of two great German regions like Bavaria, where the SPD has fallen to fourth place in the election results ranking, and Hesse, where it lost a third of the vote, falling below 20 percent. The evaporation of German social democracy is shocking since it is the heir of a party that belonged to Willy Brandt and Helmut Schmidt, among the main protagonists in European history in the second half of the twentieth century.

In Italy, the defeat of the Democratic Party, the heir to the variegated center-left, was, even more, striking with the drop from over 40 to 18 percent of the votes in the elections of March 4th. A similar retreat of socialist parties occurred in Spain and Austria. But what has radically changed the European landscape has been the collapse of  Francois Hollande’s French Socialist Party, reduced to a sad 6 percent of the vote in the 2017 elections.

Is there something in common between these repeated defeats?  Without doubt, each of them has its own particular background at the national level. But the phenomenon as a whole reveals an unquestionable coincidence: European social democracy is the main target victim of the eurozone crisis. The euro had become the seal of the end-of-century European social democracy. Twenty years later, the decline of the social democratic parties went hand in hand with the eurozone crisis.

Towards a more radical right
The eurozone crisis has also involved the center-right parties. Yet, in this case, the shift has been towards the extreme right, characterized by euroscepticism, if not an open anti-euro attitude. In Italy, the dissolution of Berlusconi's Forza Italia gave way to the League led by Matteo Salvini. In Spain, the crisis of the Conservative Party of Rajoy.  In Germany, Alternative for Deutschland has ripped votes from the CDU-CSU. In Austria, the Conservative party has formed the government with the far-right Party of Freedom. Basically, the traditional right-wing parties involved in the Eurozone crisis are increasingly focusing on a more right-wing axis.

The particularity of the Italian case is that the two main old parties of the center-left and centre-right have been both defeated.  This has opened the way to a new kind of coalition between two parties with different origins, which have made a “marriage of convenience” on the basis of a platform that, in their intention, should guarantee the new bipartisan government until the 2023 election.  Of course, this is a long uncertain perspective. In any case, the coalition government doesn’t accept submitting to the European fiscal rules that would destroy the essential points of the program on which the new government has been elected.

The threats of the European Commission are, indeed, empty. It could adopt an "excessive deficit procedure” against Italy, but this would come into effect next spring when the European election for the new Parliament will have already changed the current European setting. The European Commission has only one card to play: the attack of the financial markets on Italy with the increase in the interest rate on the debt, together with the devaluation of the capital reserve of the banks. But the prediction could remain a mere desire for punishment.

Moody's, the credit rating agency, has, in effect, downgraded Italian credit rating to one notch above junk bond status. But the following week, Standard & Poor's, while criticizing the government's program - surprising those who expected (and wished for) a downgrade - valued stable the credit rating of Italy.

The euro at stake
Italy has suffered more than any other country in the euro area. Ten years after the start of the global crisis, its growth is still around 1 percent. And national income is 5 percent lower than the pre-crisis level. Poverty has increased dramatically, also threatening most of the middle class. Unemployment in South Italy is at the level of Greece with the difference that its population is almost double.

Does change imply leaving the euro? The government denies it. The euro, as a common currency, is not in question; but in question are the irrational limits of the budget that have been imposed on it. A return to the key Maastricht rules, on the basis of which the fiscal deficit could fluctuate up to 3 percent of the GDP, will give the right flexibility to the economic policy of each member state in relation to its economic conjuncture and its structural needs.

This flexibility of fiscal policy has allowed non-eurozone European Union countries, for example, Poland and Sweden, to achieve a double or triple growth rate compared to the eurozone average. The adoption of a new and effective European framework will also allow an EU enlargement to some other countries which require accession; as well as the stabilization of the eurozone, within which the rules will be managed in the common interest,

Indeed, many things could happen after the acceleration of the crisis that followed the political change in Italy. The future remains uncertain., but something has already happened. A long and unfortunate phase of Eurozone policy is coming to an end. And it will be difficult to mourn its demise after a lost decade.

Antonio Lettieri
Insight - Free thinking for global social progress

Free thinking for global social progress