Italy’s coalition government came to power in May partly by winning an economic argument: The tight-budget “austerity” policies promoted by the European Union in the wake of the financial crises that began a decade ago were a sucker’s game, at least for slow-moving economies like Italy’s. Now the government finds itself in a battle of nerves with the rest of the 28-country E.U. that will test whether any government dedicated to this proposition can long endure.
The battle is over Italy’s budget, which fulfills most of the campaign promises of the two governing parties—the anti-corruption Five Star Movement and the anti-immigration League, each of them frequently described as “populist.” Both parties are anathema to the politicians and economists who have charted Italy’s course since the end of the Cold War, but voters, almost 60 percent of them, love the new budget. It includes a modest version of the guaranteed basic income promised by the Five Star Movement and a reversal of certain reforms (including later retirement ages) meant to trim the Italian welfare state. It uses a few tricks that will be familiar to Americans who have studied Obamacare—delaying the implementation of the basic income and early retirements, for instance, so that a full time-period of taxation gets balanced against a partial time-period of spending.
Italy submitted its budget to the European Commission in Brussels on October 15, and a week later the commission rejected it. What this means is hard to say. The commission has never rejected a budget before. On the one hand, the budget has passed Italy’s parliament. It is law. On the other hand, when Greece went bankrupt in 2010 and 2011, and almost dragged the whole European economy down with it, the E.U. claimed the right to correct its members’ budgets. Up till now, the point of submitting a budget to the E.U. Commission has been to ensure that countries do not run deficits over 3 percent.
In rejecting the budget, the commission demanded revisions and gave Italy three weeks to make them. Matteo Salvini, leader of the League, and Luigi di Maio, the Five Star leader, say they will not waver. That could lead, around Thanksgiving, to an “excessive deficit procedure” under which the E.U. could fine Italy up to 0.5 percent of its GDP. (This idea of discouraging deficits by exacerbating them has been met with an understandable skepticism by both economists and politicians.)
But there is a twist to this story. Italy’s projected deficit is only 2.4 percent. While it does exceed the 0.8 percent the government promised last spring, it is well below the 3 percent threshold at which the E.U. has traditionally claimed a right to intervene. In fact, other countries’ much larger deficits have been waved through—in 2012, France had a deficit of 4 percent and Spain of 9 percent. Italy has long run a tight budgetary ship. It even has a “primary surplus”—that is, it takes in more than it pays out except for its debt servicing costs.
The problem is that those costs are crippling. Three decades ago, Italy emerged from the Cold War more deeply indebted than any major European economy. But if this means the country is to be more trammeled in its freedom to make economic policy than its fellow E.U. members, then perhaps the grounds for political union were not there in the first place.
In the Italian government’s view, the snobs in Brussels are less interested in upholding fiscal responsibility than in punishing a democracy for choosing wrong. There are reasons for this distrust. At the height of the euro crisis in 2011, Italy’s prime minister Silvio Berlusconi was replaced by economist Mario Monti after Berlusconi reneged on structural reforms desired by financial experts outside Italy. The process involved the collusion of Italy’s ex-Communist president Giorgio Napolitano with German chancellor Angela Merkel. Days earlier, Merkel and then-French president Nicolas Sarkozy had moved in a similar way to oust Greek prime minister George Papandreou.
National sovereignty is the main thing at stake here, but it is not the only thing. The E.U.’s Greek “bailout” destroyed the country’s economy and many of its social institutions. Greece wound up in a weaker and more dependent position than before the bailout. Some Italians believe their own country was similarly damaged after 2011, in order to provide a more propitious set of economic arrangements for Germany. They make up a good deal of the support that went to Five Star and the League in this year’s elections, and they are likely to interpret the European Commission’s moves as an attempt to rally debt-traders and bond-rating agencies to bully Italy into submission. The gap between Italy’s interest rates and Germany’s—lo spread, as it is called in Rome—widened in April and May as the government was being formed, and it has widened further in recent weeks, as Moody’s lowered its rating of Italian debt.
It is a dangerous game, and sides are forming in unpredictable ways. Jean-Luc Mélenchon, the French leftist who took almost a fifth of the vote in last year’s presidential elections, has little ideological sympathy for the Italian government. He nonetheless warned that in attacking the budget of a state that had respected all its treaty responsibilities, the commission was entering uncharted waters. “This is an attack on popular sovereignty,” Mélenchon said, “whatever we might think of the choices [Italy] has made.”
If you take away a government’s authority over its budgets, you have taken away much of that government’s reason to exist. The Italian budget battle thus brings out the destabilizing ambiguity of the E.U.: It is a proudly proclaimed project for the building of a future European nation-state. But to the same end, it is an underhanded project for the destruction of the existing nation-states that make it up.
