Tourists take photographs with the Leaning Tower of Pisa in the Piazza del Duomo in Pisa, Italy. (Photographer: Alberto Bernasconi/Bloomberg)

Europe's Italian Problem Is Bigger Than Brexit

(Bloomberg Opinion) -- The new government finally taking shape in Italy is one of the weirdest coalitions you could imagine — and a pretty effective combination if your aim was to sabotage the European Union. Although predictions about where this Italian misadventure is heading are difficult, it could easily be worse than Brexit for the EU.

The coalition partners — the left-populist Five Star Movement led by Luigi Di Maio and the right-populist League led by Matteo Salvini — are poles apart in most respects, but come together over immigration, disdain for politics as usual and dislike of the EU.

With notable originality, the program they announced last week combines the high-spending ambitions of the left with the low-tax ambitions of the right. This implies a surge of public borrowing. The partners are undaunted by Italy’s current debt burden (130 percent of gross domestic product) and seem to be downright inspired by the EU’s rules on fiscal consolidation. Their program doesn’t just break those rules; it laughs at them.

“It’s necessary to review the structure of European economic governance, which is asymmetric, and based on the dominance of the market compared to the broader social and economic dimension,” says the program. The new government wants the EU to reform the single market for goods, services, capital and labor, to avoid “prejudicial effects on the national interest.” It wants a rethink of policy on immigration. And it challenges the EU’s agreements on bank reform, which it blames for the financial stress borne by Italian families and small businesses. All this is toned down from an earlier version which called for the European Central Bank to cancel 250 billion euros of debt and talked about ditching the euro.

Granted, if Italy fails to get its way, you can’t imagine it just up and leaving the EU, as Britain intends to next year — but that’s precisely what makes Italy more dangerous to the European project. The U.K. chose to leave without a plan, surrendering the bargaining power it had as a member, giving the EU the upper hand and letting it dictate terms. As a result, Europe’s chief Brexit negotiator, Michel Barnier, can radiate lack of concern over the U.K.’s departure: The EU will carry on, he says, as though nothing much has happened.

That posture won’t work with Italy. It’s much more firmly embedded, part of the euro zone and a core member of the European project. That puts it in a far better position to damage the project from inside.

Unlike Greece, it’s too big to ignore or bully into submission. It has enormous unresolved economic and financial problems — depressed living standards, high unemployment, and a fragile banking system, in addition to crippling public debt — and if it encountered a new economic or financial crisis, the damage would be difficult to confine to Italy.

Something else to consider: One of Britain’s persistent difficulties with the EU was the feeling that it ought to follow rules it disliked unless they could be changed. Italy’s record suggests a different perspective. (Reading the new government’s program, you’d never guess the country’s constitution includes a balanced-budget clause.) The willingness to ignore commitments it sees as unjust adds to Italy’s wrecking-ball potential.

It could all come to nothing, no doubt — the coalition could promptly collapse, or see its plans neutered by infighting or presidential intervention. But one should be cautious about such predictions. These ill-matched populist partners should never have come this far, and they have.  

In the past, Italy’s long tradition of domestic political dysfunction inclined many Italians to think favorably of the EU, believing that a distant upper layer of competent government was better than none. This makes Italy’s new disenchantment with Europe especially striking. Populist opposition to the EU’s remote technocratic rule is on the rise elsewhere in Europe too, but in Italy it strikes at the heart. And it’s unclear how the EU can or should respond.

The European Union didn’t get where it is today by bowing to popular doubts about its goals and methods. Europe’s peoples didn’t want the single currency. They got it anyway. Successive phases of political integration have encountered opposition — and have occasionally been rejected by referendum — but in due course were implemented regardless. The model throughout has been to do it, make it work, and the people will come around.

Even if the grandest ambitions of “ever closer union” have been shelved for the time being, that’s still the method — despite Brexit; despite Hungary and Poland; despite the rise of the National Front in France and the AfD in Germany; and now despite Italy. The EU has no other mode of operation.

At next month’s summit of EU leaders, the agenda is expected to revolve around making light of Brexit and taking new steps toward fiscal and financial integration. To be sure, further integration in those areas is necessary to make the euro zone work better. But the political foundations for further integration aren’t in place, and the foundations of what’s already there look increasingly suspect.

Brexit isn’t going to bring the structure down. Italy just might.

©2018 Bloomberg L.P.