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Italian Politics Meet European Rigidity

Italian Politics Meet European Rigidity

(Bloomberg Opinion) -- Italy’s renewed political upheaval comes at a bad time for the European Union. The latest turmoil could all too easily become a full-blown economic crisis — one that might not be confined to Italy. There’s no quick way to fix the country’s politics. But the EU can resolve, at least, to avoid making matters worse.

The latest alarm follows Deputy Prime Minister Matteo Salvini’s decision to end his party’s coalition with the Five Star Movement, whose poll ratings have plummeted. Salvini intended to trigger a vote of no confidence in the government of Giuseppe Conte, an independent, and force early elections that would give his populist League, now polling near 40%, what he calls “full powers.”

Conte resigned Tuesday, leaving President Sergio Mattarella to decide what comes next. Salvini's gamble may yet fail. Italy faces budget talks with the EU to avoid sanctions for breaking the rules on deficits and public debt. President Sergio Mattarella will want to avoid an election during that process. A new coalition is possible, or a new caretaker government. None of this offers the clarity that Italy — and financial markets — would like.

How is the EU to respond? Europe isn’t to blame for Italy’s economic problems, but the bloc’s one-size-fits-all approach has helped the populists shift the blame to outsiders. As part of last year’s agreement, Italy had to promise to hike its value-added tax, raising 23 billion euros in 2020, or find other means if it missed budgetary targets. Higher taxes for an underperforming economy with one of the highest tax-to-GDP ratios doesn’t make much sense — and wouldn’t endear Brussels to Italian voters.

That’s the problem with the EU’s entire approach to fiscal discipline: Its instruments are too blunt. Again and again, the union’s policies court unintended consequences. Plenty of countries, including France, Belgium and Spain, have fallen afoul of the EU’s Stability and Growth Pact, which was meant to persuade fiscally conservative Germany that high spenders won’t free-ride in Europe’s monetary union. Even if consistently applied, its penalties would often only make things worse. And the rules don’t sufficiently differentiate between good and bad spending. The best way to defeat Salvini’s larger argument is to admit he sometimes has a point.

The EU ought to accept Salvini’s argument for new infrastructure spending, so long as the money is well spent. (In the past, it hasn’t been.) Europe should also ensure that Italy isn’t left to shoulder an unfair share of the burden of aiding refugees, while resisting Salvini’s effort to undermine the wider commitment to that goal.

When it comes to feelings on Europe, Italy isn’t Britain — not yet, anyway. Italians feel integral to the project and know they have benefited from it. The EU’s leaders would be wise to avoid putting that at risk, and to remember that there’s more to European solidarity than ticking budget boxes.

Editorials are written by the Bloomberg Opinion editorial board.

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