Why Europe Should Care About the Italian Elections…and Why Germany Clearly Doesn’t

Two months after the Italian elections produced no clear winner, and following a period of failed coalition talks, the country's two largest parties, the Five Star Movement and the Northern League, both anti-establishment and Euroskeptic, seem to be extremely close to a deal. Then again, making predictions about Italian politics is a fool's errand, with 70 governments in 75 years, if there is one constant in Italian politics it’s instability. Still, Europe should be paying close attention to Italy’s Euroskeptic turn.

Italians have had deep political and cultural support for the EU since its creation, so the Italian electoral results should provide a stark warning to European decision-makers about the sustainability of the status quo in the EU.

Dissatisfaction with the status quo has fanned Euro-critical and anti-establishment parties, despite the fact that Partito Democratico (PD)’s last term (2013-2018)  saw positive economic trends, including higher GDP, and higher employment. Nonetheless more than half of Italians are worried about unemployment and a third fears poverty and social inequality.[1] As expectations of future well-being decline, the blame has fallen on the outgoing PD and the European Union (EU) for failing to provide the perspective of prosperity. Chancellor Merkel’s Germany, as the most visible voice in the European debate, is perceived as playing a lead role in the whole affair.

The economic situation in Italy is in fact bleak. Italy has the weakest growth of the whole eurozone (1.5 percent in 2018 compared to a 2.3 percent EU average) and the latest Eurobarometer reveals that in the minds of Italians, there is a clear causal link between Eurozone membership and economic performance. 40 percent of citizens think the euro has been bad for their country, versus a 25 percent average across the eurozone.[2]

This should concern Europe’s leaders. Should. 

Just Another Italian Job?

It is tempting to let the EU off the hook and downplay the current electoral outcome as just another instance of the quirky politics of one of Europe’s founding fathers. Many analysts will argue that the electoral outcome has little to do with Europe and all to do with the incapable and corrupt Italian elites. But the distinction between anti-establishment sentiment and anti-EU sentiment is artificial.

Italy is not France, nor is it the United Kingdom, which each have their own style of exceptionalism — the French “Grandeur,” the British “imperial hangover.” Italy is a country where Europhilia has been a trademark of both foreign policy and domestic discourse. Consider the term “vincolo esterno” or “external link,” widely used by Italian media to describe the EU and its role in shielding Italy from the weakness of its own institutions. Now  the term has been replaced by the hated “Brussels diktat,” or worse still the “Berlin diktat” — whose austerity policies are commonly believed to have acted as a further straightjacket to a country already riddled with enormous structural challenges.

Europe, in the minds of Italians, is the establishment. It is not an afterthought. It is the main interlocutor for our political leaders, whose success since 2008 has been measured on their ability to negotiate with Brussels, or rather with Berlin. During the economic crisis, our newspaper pages were filled with spats between Angela and Silvio, and in the end our Prime Minister was deposed During the migration crisis, Prime Minister Matteo Renzi was blindsided by “Mutti” as she unilaterally decided to accept 1 million refugees, after years of Italian pleas to embrace a common migration policy or help with massive migration inflows. Local Italian newspapers, spun this as Merkel preferring to take in refugees than transferring another euro to her southern partners. Europe may choose to ignore it, but this election was absolutely about Europe and Italy’s perceived powerlessness in Europe.  

Dangerous Normalization of Italian Angst

At this time it is unclear what shape Italy’s European agenda will take. If the Five Star Movement allies  with the Northern League, this  will probably result in a hardened stance vis-à-vis the EU, as the parties share many programmatic views that challenge the European status quo, particularly in terms of more  left-wing economics (pro basic income and bank nationalization, anti- euro and free trade)  as well as the parties’ (closeness to Putin's Russia and appreciation for Donald Trump and Viktor Orbán).

Whatever shape this Italian government will take, it will be held together by a shaky political compromise with weak legitimacy, and thus will have limited capacity to drive policy in Europe. So it may not (be able to) be the dramatically anti EU actor in Brussels media across Europe initially worried about.

Nifty. Except that, instead of seeing Italy’s electoral results as a fantastic wake up call for Europe, mere days after election day — after the markets failed to deliver a dramatic crash — the policy community has done exactly the opposite of learning its lesson, it has normalized the winds of change in Italy and changed its tune from “incumbent disaster in Italy” to “just another day in Italian politics.”

It has selectively chosen to ignore the fact that with a 132 percent GDP to debt ratio, the eurozone’s third largest economy’s public finances are precarious at best. And Italy is way too big for the European Stability Mechanism to manage.

In a nutshell, the reason why Europe cannot afford to ignore the Italian political question is that Italy, unlike France or the U.K., is a crucial political thermometer for the EU. And, unlike Greece or Portugal, an Italian economic collapse can kill the eurozone.

Many have all too soon interpreted the taming of the once wild anti-euro discourse of the 5 Star Movement and the Northern League as a disaster averted. But if Italy’s two largest and most Euroskeptic parties — representing a hefty two thirds of the Italian electorate — are incapable or unwilling to put forward concrete proposals for European reform, this is less a disaster averted than a missed opportunity.

The greatest risk is that Italy’s inertia will once more provide an excuse to its northern European partners to continue on a path of quarreling over merely cosmetic adjustments to the EU project — in the delusional assumption that the current set-up of the EU can weather the Euroskeptic storm without addressing its grievances, and that Italy’s voters will eventually come around, or be silenced — the way the Greek ‘OXI’ vote once was.

Dismally and yet unsurprisingly, we are already witnessing the first loud and clear signs of denial-inspired political thinking. We see it in the Handelsblatt´s reading of Macron's latest visit to Berlin where Germany’s position on the European Deposit Insurance Scheme was interpreted as a clear message to Macron that he is alone in matters of Eurozone reform.[3] It is evident in the statements of Germany´s new finance minister, Olaf Scholz, who as a Social Democrat (SPD) could have been expected to be natural ally to Macron's European ambitions, when he claims that the Ministry will pursue further  fiscal tightening in line with, or stricter still, than the position held by his conservative predecessor Wolfang Schauble.[4] “A German finance minister is a German finance minister, after all,” quipped Scholz.[5]

Scholz’s position is particularly disappointing because the SPD leadership after the election had voiced strong pro-reform positions and managed to negotiate far-reaching concessions for EU reforms into the coalition agreement with the CDU.

The familiar narrative of German politicians´ hands being tied by an unforgiving and conservative electorate also no longer holds in the light of  latest public opinion polls in Germany, where data reveals widespread support for reform with 82 percent of Germans thinking it’s a good idea that Macron wants to advance the EU, 58 percent think Merkel should stand up for the EU with more passion and only 48 percent say Macron’s Eurozone proposals go too far.

Furthermore, France and Germany´s failure to involve Rome in exclusive talks on Eurozone reform, has done nothing to appease Italian distrust. Granted, the elections and subsequent power vacuum provide a justifiable excuse, but in a context where many of the floated ideas for reform are discussed with an eye to the unstable finances of Italy, excluding the subject of such reforms is not bound to go well with whoever takes on political leadership of the country, much less with the much dreaded public opinion. More alarmingly still, for France, to not see the potential of a strongly Euroskeptic, pro-reform, pro-Social Europe political force taking over in Italy, would be a poor strategic move, in a political landscape that sees Macron increasingly alone on the European stage.

It may be instead in Macron’s interest to extend a hand, or rather an ear, to the new Italian government and go back to the drawing board on a few reform elements that could gain the buy-in of Italian partners and gently nudge Italy to concede and significantly mitigate some of the more alarming elements of its economic program, which would trigger the fears of Northern partners and the European Commission alike — in favor of a broader political compromise which they can realistically sell to voters back home.

What Italy Needs to Give France (and Germany?) What They Want

Solutions are not simple ones, but there is significant material on which to chew. From the Franco-German economists joint paper championed by Enderlein and Pisani-Ferry, to the criticalities of such proposals as highlighted by the response of Italian economists,  to the Italian contribution to the Five Presidents´report on the EMU, or the Italo-German economists´3 step proposal for a strengthened eurozone, there is no lack of overtures to finding common ground on a eurozone reform that balances risk-sharing with fiscal discipline, and which provide a solid basis for continued compromise-building. Going forward, there are a few elements that could be important, if seriously addressed, in winning back some support for eurozone and broader EU reform in Italy.

• More joint financial resources, partly financed through an EU common fiscal capacity (perhaps gained through EU-wide taxes on digital profits), to absorb asymmetric economic shocks and boost growth, in particular focusing on:

  • A comprehensive investment effort at the EU level, possibly a significantly strengthened Juncker Plan, and increased structural flexibility in national funds for investments considered strategic at European level as well as a push for the implementation of measures to boost productivity rather than simple adherence to fiscal targets;

  •  A strengthened EU social pillar, providing for a European unemployment insurance scheme, among other measures aimed at alleviating extreme poverty and deprivation. The leaked coalition agreement between the Five Star Movement and the Northern League indeed talks of a basic income measure co-financed by the EU.

  • A stable and credible European Deposit Insurance Scheme, as part of a broader package of eurozone reform.

• A deal on migration and a revision of the Dublin agreement, to envisage the co-financing and co-management of external borders and migration policy, could soften the Northern League on other policy areas.

• Finally and perhaps most importantly, the crucial element of ensuring at all cost a strengthened democratic legitimacy of EU decision-making, especially important to the Five Star Movement,  and which points to a necessary rethinking of the parliamentary control, both at the European and the national levels, of eurozone decision-making, to be pursued hand in hand with any other reform measures.

Whatever the path, the building of new political compromise on such delicate ground will require an enormous effort in political diplomacy on the part of Germany and France, who will have to ensure that Italian partners feel appropriately involved and engaged in the decision making on ways forward. This might not be the fast reform pace that France in particular may have hoped for, but it may be the only solution to avoid eurozone collapse. Altogether, the lesser of evils. And it, or rather Italy, may well prove to be the only way to pressure a German government into actual reform talks.  

The current reactions to Italy´s election though beg a question, or rather two. If Italy is lost, as it is, with a sweeping majority embracing Euroskepticism, and Europe reacts by increasing resistance to any change in the status quo, how long do our German partners genuinely believe they can hold together an economic system by warily dragging along dissatisfied partners in the hopes that the next electoral round will not produce a political force willing to kill the EU? And if we believe that German politicians are not naïve enough to craft policies of intimate interest to the German population, by buying into the former blue sky optimism, then there is only one question which remains. If Germany (and perhaps France) has in fact accepted Italy as lost, and its contingency plan rests on a two-speed Europe with Italy outside of the fast-track, and possibly outside of the euro — then the doubt arises as to who will be the next partner to be gently nudged off the European boat by inaction and complacency, or as some have more eloquently suggested, by “sleepwalker politics.”

_{[1] https://www.ipsos.com/en/what-worries-world-january-2018}

_{[2] https://www.politico.eu/article/italy-reconciles-with-euro-but-risks-remain-election-2018/}

_{[3] http://cducsufvk.de/wp-content/uploads/2018/04/180410-Beschluss-EU-Finanzpolitik-HuF-Kiel.pdf}

_{[4] https://www.ft.com/content/1c1b4fea-2ab6-11e8-9b4b-bc4b9f08f381}