The EU’s despicable behaviour towards Italy should remind us of the perils of being in the club

This week, the European Commission initiated an ‘excessive deficit procedure’ (EDP) against the Italian government, hitting it with a charge of €3.4 billion for refusing to drop its latest budget. There is little economic rationale for such an action – why should a country which is allegedly overspending be forced to spend more on arbitrary fines? The motive behind the EDP is political: it affirms that deviation from restrictive EU fiscal policy is a punishable offense.

Italy’s pro-growth reform package is, by the admission of the German finance minister, a serious attempt to combat ‘astonishing’ economic problems: rising unemployment, declining growth, negligible demand, an eroded welfare system and stagnant wages. With 11 percent of Italians living below the poverty line, analysts predict that these factors will soon drive the country into a deep and painful recession. Which is why the populist coalition, led by Giuseppe Conte, has taken steps to avert catastrophe.

It has proposed a basic income of €780 per month, funding for employment centres, lower taxes for small businesses, the modest reversal of pension cuts, investment in infrastructure and a freeze on VAT hikes. While these spending plans are far from perfect, they are founded on a principle vindicated by post-war history and endorsed by leading experts: stimulus, not austerity, is needed to revitalise a slowing economy. As Nobel Prize-winning economist Joseph Stiglitz puts it, ‘Anybody who says we should go back to austerity or that we should not have stimulus just doesn’t understand economics’.

This basic pillar of economic logic is not recognised by the EU, however, which continues to insist on deficit reduction. In a detailed letter to the EC, Italian finance minister Giovanni Tria explained the rationale behind his pro-growth policies. Right now, Italy is suffering a brain-drain as skilled workers leave the country and unemployment depletes tax revenues for the government. Investment in job schemes and infrastructure is therefore vital to generate returns which Italy needs to repay lenders and service its economy, whereas further cuts will drive up the debt-to-GDP ratio (as they did in Greece).

In a terse response, the EC’s Valdis Dombrovkis and Pierre Moscovici attacked Tria’s ‘serious non-compliance’ with EU rules. ‘Boosting potential growth and tackling long-lasting stagnation in productivity require a comprehensive reform strategy’, they conceded. ‘However, the measures included in the 2019 draft budgetary plan also indicate a risk of backtracking on reforms that Italy had adopted in line with past Country-Specific Recommendations, as well as with regard to the structural fiscal aspects of the recommendations addressed to Italy by the Council’.

The difference between the two letters is striking. Tria deploys clear and concise economic arguments. He examines the deceleration of the Italian economy, global growth forecasts, the effect of recent fiscal policy and the need for infrastructure maintenance following the collapse of the Genoa bridge. His case for stimulus is based on a focused evaluation of Italy’s condition and trajectory. The reply from Dombrovkis and Moscovici, on the other hand, does little beyond pointing out the incompatibility of Tria’s plan with EU policy. As the above excerpt attests, they are only concerned with whether the budget is ‘compliant’ – not whether it works for Italy.

What we have, then, is a confrontation between pragmatists and dogmatists – between a government which, though unpalatable in most respects, has mounted a legitimate response to Italy’s economic problems, and a cadre of technocrats whose pursuit of spending cuts is purely ideological. As if to illustrate this point, the EC refused to endorse Tria’s budget even after he made clear that ‘if the deficit-GDP ratio and the debt-GDP ratio do not evolve in line with the plan, the government commits itself to intervene’ so that deficit-reduction targets are ‘rigorously respected’.

In other words, the issue is not even whether to shrink or grow the deficit: the EU insists that any deficit-reduction strategy must align with neoliberal orthodoxy. Countries under its dominion are forced to accept that austerity is the sole answer to an austerity-induced slowdown.

As it stands, Conte’s administration is refusing to budge on its fiscal policy. It knows that, by violating Italian sovereignty, Dombrovkis and Moscovici will fuel the populist resentment which galvanised the government’s supporters at the last election. By launching an EDP, the Commission has handed the Italian insubordinates a significant propaganda victory, paved the way for an EU referendum in Italy, and (perhaps most dangerously) increased the coalition’s mandate to pursue further anti-migrant policies, which will be framed as another courageous stand against the detached and undemocratic technocracy.

No matter how chaotic the Brexit process has become, we should remember that Italy exemplifies the chaotic effects of continued EU membership. Since the 1980s, the EU has blocked numerous Italian laws which contravene state aid rules. In 1997 it took legal action against the Italian government over the Marcora Law, which facilitates the creation of worker-owned cooperatives. Elected politicians such as Silvio Berlusconi and Paolo Savona have been ousted and replaced by EU stooges. And the European Central Bank is currently scaling back its purchase of Italian sovereign bonds to pressure the government into capitulation. Remainers who are willing to sacrifice sovereignty for stability should ask how much of the latter Italy has enjoyed under EU rule.