Brexit protesters wave flags made up of a European Union flags and British Union flags, otherwise known as a Union Jack, outside the Houses of Parliament in London, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

The EU Is More Worried About Italy Than Brexit

(Bloomberg Businessweek) -- One of the mantras in the campaign to take Britain out of the European Union was that the country needed to escape a continent in disarray. Leading Brexit backer Michael Gove pointed to Europe’s sluggish economy and the burden of the Greek financial crisis. He even suggested that the EU had jeopardized security by letting in terrorists. By wresting back control of its borders and trade, Britain could “show the rest of Europe the way to flourish,” he said.

Two and a half years later, the rest of Europe is watching as the biggest political crisis in Britain’s post-imperial era unfolds. The economy has taken a hit since the 2016 referendum and is now growing more slowly than the euro region. British Prime Minister Theresa May is clinging to her job as she tries to push through a Brexit deal that’s been pounded by many in her own party for capitulating to Europe’s demands. The government in London is figuring out how to keep food and medical supplies flowing if the country falls out of the EU’s seamless customs market without a divorce agreement. In short, it’s hard to overestimate the humbling mess now on the other side of the channel.

Rather than divide and conquer the EU, Britain has shown how isolated it always was, an island nation that never embraced the European integration project and at best misread its own importance to it. As the world’s fifth-largest economy, Britain is certainly no Greece. Nor is it the perpetually unfinished jigsaw puzzle of a government that is Italy—even though some analysts are predicting that kind of chaos for the U.K. But the political psychodrama that’s been unleashed reflects the reality of the European pecking order. The truth is, the EU has fires to fight that could be more fundamentally damaging than Brexit: Nationalists echoing the Leave campaign’s retaliatory swipe against EU encroachment have tightened their grip in eastern states—particularly Poland, which gets more money on a net basis from EU coffers than anywhere else.

And, by far, Italy is a more pressing—and existential—issue for Brussels than Britain. A founding member of the EU and the euro single currency, Italy has long been one of the most pro-EU countries. But its nationalist-led government is now straining at the bloc’s budget constraints. On the eve of the Brexit meltdown in London on Nov. 14, when May’s cabinet fractured over the withdrawal accord reached with the EU, the Italian government met in Rome to draft a riposte to European officials’ rejection of the country’s draft budget. Prime Minister Giuseppe Conte’s cabinet would stand behind a deficit target that the European Commission says breaks its rules and a growth forecast that officials in Brussels dismissed as being unrealistic. Italy’s economy is the third-biggest in the euro region, and its debt mountain is the highest in real terms. Yields on Italian 10-year bonds, whose gyrations served as an alarm bell for investors, politicians, and the European Central Bank during the continent’s debt crisis of a few years ago, have doubled since May.

“This is a matter that not only involves Italy but involves all of us,” Dutch Finance Minister Wopke Hoekstra said in Brussels on Nov. 19. “It’s imperative that the commission does what’s in the interest of all the different European countries.”

The Brexit deal that’s been struck keeps Britain attached to EU trade rules for the foreseeable future—if it can jump the formidable hurdle of getting support in Parliament following a spate of ministerial resignations. Even some pro-EU lawmakers say the pact will reduce the country to a “vassal” of Europe. Anti-EU hard-liners who predicted Europe would eventually yield to Britain are now maneuvering to keep alive their dream of reviving the country’s role as an independent force in the global economy.

“The British premise in this was ill-fated, because it was not thought through from the beginning,” says Josef Janning, a senior policy fellow and head of the European Council on Foreign Relations office in Berlin. “The British side had a number of misconceived opinions about this entire process and its own position.”

Any sympathy for Brexit among other potential European rebels was short-lived. European capitals rallied behind their Brexit negotiator, former French Foreign Minister Michel Barnier, and it helped that the constant drip of bad news for the U.K. economy provided a warning to any would-be imitators. Italy’s populist rulers have insisted they won’t abandon the euro or the EU, though that’s not stopping them from spearheading one of the biggest challenges to the bloc.

Among the many twists possible between now and Britain’s exit from the EU are the ousting of Prime Minister May, an election, or a second Brexit referendum. The ultimate risk from an impasse would be a no-deal crash out of the bloc in March. The gung-ho willingness of Brexit die-hards to embrace that scenario rather than acquiesce to an agreement that appears to favor Europe shows how ideology has overwhelmed British politics more than at any time since the free-market-vs.-socialism battle of the 1980s.

As of now, the force of numbers is what counts between Britain and the EU. “It was never credible that the U.K. could have the kind of relationship the Brexiters envisioned,” says Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics in Washington. “The U.K. is negotiating with an economic power five times its own size—and that matters.”

To contact the editor responsible for this story: Jillian Goodman at jgoodman74@bloomberg.net, Howard Chua-Eoan

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