The EU is treating Italy badly. But the country's problems go a lot deeper than that.
A long way to the south of the bright lights and high drama of the Brexit negotiations, another, equally serious problem has been brewing in the European Union.
The EU has now commenced with an excessive deficit procedure against the Italian government for its budget proposals, which could end with serious financial penalties. In a piece earlier this week, Oliver Eagleton asserted that this was regressive; that it made no sense to penalise a struggling economy for trying not to struggle, and that this was a mark of the ideological EU flying in the face of rationality.
On most of these points, Mr Eagleton is correct. But, as ever with Italy, the situation isn’t as straightforward as it my first appear.
To understand Italy, one needs to realise that it is essentially two countries, and therein lies most of the problems for its economy. The North is a different beast from the South – the regions of Veneto, Lombardy, Emilia-Romagna and Piedmont contribute as much to Italy’s GDP as the other 17 regions combined. Sure, austerity has done little to help an already struggling economy. But the problems have their roots as much in structure and culture as the EU’s economic policy.
There are many lengthy books explaining why no amount of previous spending has been able to lift Southern Italy out of its stupor. But it boils down to a combination of things. First, the South missed the boat of the industrial revolution and still has an economy based around agriculture. It also has a long history of migration: the Italian communities in the United States, Australia, Argentina and elsewhere are largely Southern in makeup. And, of course, there is the twin-headed viper of corruption and bureaucracy which feeds heavily on the South.
In some ways, several areas of the proposed budget are indeed positive. Italy needs an injection of cash, and lower rates of VAT and small business taxation is to be welcomed – possibly they don’t go far enough. But without changing the culture of Southern Italy, it will continue to be a burden on the North, and this budget won’t even begin to address that. And, while Matteo Salvini may have succeeded in transforming the Lega from a separatist party to a national one, that doesn’t mean that regional enmities have disappeared. Northerners still resent their Euros, as they did their Lira, being used to prop up a ‘lazy’ South; Southerners, meanwhile, do not easily forget nor forgive decades of barbs and poverty.
Other areas of the budget smack of desperation. Italians have low levels of personal debt, so it is unclear what stimulus effect, if any, a universal basic income will have; if the example of Norway is anything to go by, people will just save it. Job centres, meanwhile, are all well and good, but essentially pointless if there are no jobs in the first place; the current brain drain isn’t just from poor wages, but a lack of employment opportunities overall. Tax cuts can only go so far in stimulating businesses to grow. The reality is, Italy will need to devalue its currency if it is to become competitive – which it can’t do whilst locked into the Euro.
And here we get to the crux of the issue. The EU, as Mr Eagleton says, is needlessly wedded to its ideology, to the point that it is prepared to cut off its nose to spite its face. But it can’t afford for Italy to go bankrupt, nor, in many ways, can it expel the Italians unless they break enough rules. The fallout from such an exit would also be pretty damaging, and it wouldn’t be long before the Spanish and French economies started veering downwards. The more countries sucked into the domino effect, the more panicked Germany will become. The coalition in Rome know this, which is why they are prepared to play hardball, breaking enough rules to invite Brussels’ ire without overstepping. But it is a dangerous game. If the bluff is called, and Italy is punished or forced to leave the EU, the damage will be catastrophic. And its unclear if the Lega or Movimento Cinque Stelle have the political capital to survive such a blow.
Mr Eagleton is right that the coalition is thriving from the PR of taking on Europe. His assertion that the EU is pushing Italy closer towards a membership referendum is less sound; Italy doesn’t have a legal mechanism for such a referendum, while opinion polls show that while euroscepticism is rising, fear of economic collapse trumps it.
Moreover, we should not make the mistake of taking the Italian government for a collection of well-meaning pragmatists. Coalition politics are at play here, and both sides have an eye on the future – and taking the opportunity to blame the other of something should go wrong. The Lega know that political capital can be gained abroad as well as at home – the rise in euroscepticism within the Visegrad group, as well as neighbouring Austria, provides an opportunity to form a powerful bloc within the EU to change its direction. In the West, we dismiss the leaders of these nations blithely as ‘populist’; they see themselves, instead, as true cultural Europeans, standing up for the interests of their peoples, and facing down Western post-nationalism. It is unclear why they would want to push to leave such a bloc, especially in such a poor financial situation.
Both sides in this are ideologues. Both sides are also astute politicians. It’s an explosive combination. The EU has already shown that it doesn’t really do compromises, while this new breed of Italian Government lives and dies by its assertion that it will fight Brussels to the end. And if neither side comes to the table, the outcome for both looks bleak.
