Italy's Populists Show How to Lose Friends and Alienate People

(Bloomberg) -- In their first two weeks in power, Italy’s populist leaders sparked a dispute with France over immigration and threatened to scupper a landmark European Union trade pact with Canada.

It’s hardly the way to make friends with European partners in key deciding positions when Italy seeks approval for the big-spending budget plan it will submit to Brussels in four months.

That’s not all Italy wants from the EU: Industry Minister Luigi Di Maio, leader of the Five Star movement, said last week he would seek a greater allocation of EU aid funds. His coalition partner, Interior Minister Matteo Salvini of the League, is calling on other countries to do more to accept immigrants who cross the Mediterranean and turning back ships headed to Italy.

The demands risk violating an unspoken but fundamental principle of the EU: You give some, you get some. If Italy’s leaders alienate nations that should be their allies, they may find little sympathy when seeking support for their own agenda.

Italy’s feud with France over migration “is not the best way to have friends,” said Lorenzo Codogno, LC Macro Advisors Ltd. founder and former chief economist at the Italian Treasury. “But i think on this issue they don’t care about having friends. They really want to make a point.”

First Meeting

The need for alliances may be on Prime Minister Giuseppe Conte’s mind when he meets German Chancellor Angela Merkel in Berlin on Monday, although his timing is less than ideal. The German leader is facing sharp criticism from her own coalition partners over her liberal migration policies. And even though Conte and French President Emmanuel Macron pledged to work together when they met on June 15, their war of words over immigration last week won’t be forgotten.

Di Maio and Salvini took power largely thanks to their anti-establishment credentials and not-so-kind words for the EU. The percentage of Italians who trust the union was 38 percent last month, almost half of the 70 percent in 2011, according to an Ipsos poll in Corriere della Sera. Still, only a quarter of respondents said they would vote to leave the bloc.

It may come to a head in October, when Italy will have to submit its draft budget to Brussels for review. The government’s plans to boost spending and introduce tax cuts have been estimated at over 100 billion euros ($116 billion) in its first full year, flying in the face of the country’s commitments under EU budget rules.

The European Commission, which enforces these rules, expects the country to reduce its structural budget deficit by 0.3 percentage point this year and more next year. Not doing so could place Italy in the so-called excessive deficit procedure, which could end up in fines.

“Words matter to a limited extent in this context. Action matters and domestic politics matter,” said Guntram Wolff, director of the Bruegel research institute in Brussels. “The fundamental question is: Will Italy accept the rules or significantly deviate? If they deviate then we’re in for some turbulence.”

“More Isolated”

Nor are Merkel or Macron likely to give Italy much backing or leeway in the spending plans. The two leaders are currently debating ways to ensure the euro area is better equipped to withstand any financial crisis like the one a decade ago, which was largely caused by member countries’ excessive spending.

Read more on the Greek crisis: QuickTake Q&A

The Italian leaders “are definitely more isolated in Brussels and Europe and that was in a sense the point of their election,” Wolff said.

While Italy’s new government has arrived as the euro area is recovering and more mechanisms have been put in place to deal with a crisis, the sheer size of its economy and debt offer cause for worry were it to threaten to leave the bloc. The extra premium investors demand to hold the nation’s 10-year securities over similar-dated German notes touched 323 basis points last month, a five-year high, though it has fallen since then.

The dispute over immigration was sparked when Italy refused to accept an immigrant rescue ship carrying about 600 people on June 11. Malta also declined; Spain eventually agreed to allow it to land. Macron called the decision “cynical and irresponsible,” leading Italy’s foreign minister to summon the French ambassador in Rome and the finance minister to cancel a meeting with his French counterpart.

No, Canada

Then on June 14 Agriculture Minister Gianmarco Centinaio said his country wouldn’t ratify a free-trade accord between the EU and Canada. Even though the move isn’t an outright block, it could still cause further friction with the EU, which spent five years negotiating the accord.

Not only are Salvini and Di Maio alienating the European establishment, they have little or no political affinity with other leaders. Neither of their parties belongs to a major political family. Instead, in the European Parliament, they are both part of two different fringe groupings -- which include Nigel Farage’s UKIP and Marine Le Pen’s National Front.

The way Italy’s upstart politicians are antagonizing the EU raises echoes of Greek Prime Minister Alexis Tsipras and his then-finance minister, Yanis Varoufakis, in their early days in power in 2015: picking fights on multiple fronts, inflaming anti-Brussels rhetoric at home and burning bridges with allies across the EU.

Ultimately, faced with a looming default and euro exit, and the EU’s intransigence about bending its rules, the young Greek premier was forced to back off of most of his electoral promises, stick to euro-area prescribed fiscal policies, drop calls for debt forgiveness and adopt a more conventional tone.

But Italy also has more leverage than Greece did, former finance chief Varoufakis said in an emailed comment. “2.6 trillion of debt, an economy that generates a trade and a government (primary) surplus can neither be bullied nor ‘bailed’ out by the same toxic means applied to Greece,” he said. “Even if this government capitulates to the EU, Italy is simply unsustainable within the rules Berlin is insisting upon.”

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