A clear pattern has emerged in European societies since the outbreak of the euro crisis in 2010-2011, in which several eurozone member states (Greece, Ireland, Portugal and Spain) were threatened with bankruptcy and had to be bailed out by the European Union (EU) and the International Monetary Fund. People across the socioeconomic spectrum are casting their votes in support of populist, anti-establishment movements and parties whose leaders offer a nationalist vision of the future combined with a strong dislike for the political culture of liberal democracy and the values professed by the EU — including overt skepticism over the single currency, the euro.
However, as yet, it is only in Italy that the political pendulum has moved so far to the right that an all-populist government was eventually allowed to be formed, after some dramatic developments in which Italian President Sergio Mattarella blocked the nomination of Euroskeptic economist Paolo Savona for the position of head of the Ministry of Economy and Finance. But this is hardly a consolation to Brussels, for there is probably no more problematic country in all of Western Europe today, save Greece, for undergoing such political changes.
Given Italy’s fiscal and overall economic state of affairs, it is through sheer luck that a full-blown financial crisis has not erupted in the eurozone’s fourth-largest economy, and eighth-largest in the world by nominal GDP. The country’s public-debt-to-GDP ratio reached 132 percent in 2018, the highest level since unification in 1861, and the fourth-largest worldwide. Such high levels of public-debt-to-GDP ratio are prohibited under the European Monetary Union, where a single currency zone exists among scores of highly diverse economies and political cultures, but without a fiscal union or fiscal transfer mechanisms to address competitiveness imbalances, which are quite severe between Northern and Southern Europe.
Lest we forget, the Greek debt crisis exploded in early 2010, with the private international credit markets sending borrowing costs to stratospheric levels, when the country’s public-debt-to-GDP ratio was believed by the end of 2009 to have been around 127 percent. The fact that about 60 percent of Italian debt is held by its residents has provided something of a safety cushion against a yield market backlash. However, this is unlikely to continue indefinitely, given the shaky standing of the country’s banks, which hold more than 75 percent of this debt owned by residents — a concern which will be magnified now that an extreme populist government will be in charge of Italy’s public finances.
Indeed, markets have already shown increased nervousness to the formation of an all-populist government cabinet. The gap between Italian and German government 10-year bond yields has grown significantly lately, (by more than 75 basis points between April to May) and the gap will surely grow if the economic policies advocated by the leaders of the Five Star Movement and the Northern League are adopted by Prime Minister Giuseppe Conte.
Both the Five Star Movement and the Northern League advocate a potpourri economic agenda which appears attractive to the rich and poor alike, with sharp tax cuts (both parties favor a flat 15 percent tax rate) and a social safety net. The agenda also promises to rid the country of undocumented immigrants and further curb immigration.
If implemented, the tax cuts will significantly worsen the country’s fiscal condition, as less revenues pour into public coffers, leading to further inequality and popular discontent, not simply with regards to the condition of the national economy, but also over the euro and the draconian fiscal adjustment measures that the all-populist government will be forced to implement under pressure from Brussels, Berlin and the bond markets.
The political situation inside Italy is also quite precarious, leaving little room for dramatic policy decisions like an exit from the eurozone.
While a significant portion of the Italian population is quite skeptical (if not in outright opposition to) a single currency, the majority of residents continue to support the euro and would oppose withdrawal from the eurozone. It is precisely because of this reality that the anti-euro rhetoric was significantly toned down by both the Five Star Movement and the Northern League during the campaign prior to the March elections. Further, the original selection of Savana for the position of finance minister was clearly not part of some planned strategy aiming to release Italy from the clutches of the single currency regime but, rather, a move designed to counter the weight of Germany with regard to eurozone fiscal and economic policies — with the threat of a withdrawal from the euro to be used as a potential negotiation tool.
In this context, it is clear that the all-populist government of Conte is caught between a rock and a hard place: Whatever policies it seeks to implement will face challenges and resistance both inside Italy and on the international front, mainly from Brussels and Berlin. Moreover, the international credit markets will also act as a deterrent to the extreme and unfriendly policies to the economic status quo in which Italy finds itself.
However, the all-populist government in Rome will soon find out that its incoherent economic agenda will be extremely difficult to implement. Even if its agenda does come to fruition, the government will have to grapple with its generation of mass discontent inside the country, as well as huge deficits and heavier public debt levels. Either way, the Eurocrats will surely begin to lose a lot of sleep over the disturbing political and economic developments in Italy that will surely follow under whatever course of action the Conte government decides to embark on in the months ahead.
The coming of age of extreme populism in Italy is a natural and expected outcome, given the inability or unwillingness of the EU to proceed with the kind of meaningful and necessary reforms that would allow the largest economic bloc in the world to function in a way whereby monetary stability does not hinder economic growth. Further, the dogmas of neoliberal economics reign supreme in the bloc, despite of the misery they cause to the working populations just so the European business world can stay highly competitive in a globalized economic environment.
Indeed, as long as the EU continues with its long-standing impasse over architectural reforms in the European Monetary System, extreme populism in Western Europe will find fertile ground for spreading nationalistic, xenophobic and even racist ideas, and combining them with a catch-all economic agenda which, if implemented, will actually make things far worse for already heavily indebted countries such as Italy. Instead, these economies are in dire need of sustainable development, job creation programs, progressive (instead of regressive) tax systems and higher wages.
Such goals for countries inside the Eurozone can be attained only under the economic vision of a social Europe rather than a neoliberal Europe. Yet, the real power brokers in the EU, with Germany as the head of the fiscally reactionary club of Northern euro member states, have continuously opposed an alternative path to European economic and political integration. This trend has been instrumental in itself in contributing to the rise and spread of extreme populism and anti-EU sentiments throughout the continent.
Perhaps the coming storm in the euroland — which will surely come when the all-populist government in Rome discovers that having the cake and eating it too is a recipe for economic and political disaster, and making the eurocrisis of 2010-2011 look like a garden party — will finally force Berlin and Brussels to join the right side of history. If not, the vision of European integration will turn into a political nightmare that will bring back memories of pre-World War II conditions.