The Best Way to Answer Italy’s Populists

(Bloomberg Opinion) -- Italy’s populist government has decided to press the “self-destruct” button with its forthcoming budget. How should the rest of the EU react? The European Commission and other governments are right to demand that Rome follows the rules. But there’s no point in ratcheting up the rhetoric, as Jean-Claude Juncker did with his comparison to Greece. It’s best to leave it to investors, who are making it clear enough what they think of the coalition’s economic strategy.

Last Thursday, the Italian administration said it would target a budget deficit of 2.4 percent of gross domestic product next year, much higher than the previous government’s aspiration. The ruling League and Five Star Movement said they would use the extra borrowing to lift current spending, including lowering the pension age. To make things worse, there’s still no document outlining what Italy’s future fiscal strategy will be. By some accounts, it will keep the 2.4 percent target for each of the next three years. The financial markets have understandably taken fright, sending 10-year bond yields to their highest since 2014.

On Monday, Italy’s technocratic finance minister Giovanni Tria had the daunting task of explaining Rome’s strategy to his European colleagues. He favored a lower fiscal target, so his credibility has been significantly tarnished. If Tria wanted to reassure his partners, his mission was a failure. The Dutch finance minister, Wopke Hoekstra, said he was “somewhat less optimistic.” Juncker, president of the European Commission, went much further. “We have to do everything to avoid a new Greece — this time an Italy — crisis,” he said. He added that Italy would not get special treatment, since doing that for everyone “would mean the end of the euro.” 

Brussels is right to demand that Italy sticks to the rules. True, the EU’s fiscal guidelines have been relaxed in recent years to accommodate Europe’s snail-paced recovery. But Italy’s proposed plans make a mockery of Europe’s rulebook, and of common sense. They casually brush aside the country’s very high public debt and the fact that it isn’t in recession. They seem to offer no coherent medium-term strategy to reduce the deficit. And they double down on unproductive current spending, while doing little to boost investment. The Commission might have offered some leniency for a better designed budget. In its current form, it would be right to reject it.

Where Juncker and his colleagues need to be careful, though, is in how they deliver the message. The League and Five Star leaders, Matteo Salvini and Luigi Di Maio, thrive politically by standing up to Brussels. They’re already portraying their budget as a gift to the Italian people, which wicked eurocrats want to stop. And Italian voters are behind them, for now. A recent poll shows Five Star is recovering support, while the League’s surge in post-election popularity remains stable.

A far cannier strategy would be to simply apply the rules, without dramatizing the clash. The European Central Bank is stepping back from its scheme of quantitative easing, making bond investors much more careful about where to lend their money. Italy is giving them every reason to go elsewhere. Far better to let Di Maio and Salvini sell the consequences of that to the Italian people, than offer them up a convenient outsider to pour hate on. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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