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Italy crisis

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The sovereign debt crisis in the Eurozone appears to have returned, at least that is how a swathe of commentators are interpreting Italy’s travails in forming a government. In its original guise, the 2010 panic over whether countries such as Greece or Ireland might be forced to abandon membership of the Euro arose because governments in these countries faced a “sudden stop” of access to international credit markets. This situation reflected the fact that while the Eurozone has a common currency each member state is responsible for its own debts.

Lenders in the first years of the Euro did not distinguish much between the risks, and hence cost, of lending to the different Eurozone governments. That all changed radically in 2010 as market actors became fearful of the ability of certain countries to repay their debts. The result was dramatic shifts in the “spread” of interest rates for Italian bonds compared with the higher rated German ones.

Measures to reform the Eurozone and intervention by the ECB were essential to stabilizing the spread between the interest yields of the different countries that use the Euro. Market confidence in the Euro is nevertheless still reliant on confidence in governments’ individual willingness to play by its rules, notably those that constrain budget deficits, i.e. the Stability and Growth Pact. That is why, as many astute commentators noted, the real test of the apparent stability achieved after 2012 would be the next crisis, which is where the Italian election of 2018 enters the picture.

The two parties that sought to build a new government, M5S and La Lega, dispute the benefits of the single currency for Italy and are hostile to its current system of governance. They advocate counter-cyclical, pro-growth public spending to end a more than decade-long stagnation of the economy under governments that have stuck to Brussels’ tight spending rules. As Italy has the largest debt burden relative to GDP of the main Eurozone countries, its potential unwillingness to play by the rules has spooked the markets, leading to a rise of the spread and fears that there could be a contagion effect whereby panic might set in and affect the terms of borrowing for other countries, as happened in 2010-12.

All this has echoes of 2011, when the government of Silvio Berlusconi fell and a so-called technocratic government led by the unelected Mario Monti took the helm, becalming the markets by sticking to the strictures of the Stability and Growth Pact. Il cavaliere’s sudden fall from power can be seen as the first manifestation of the split between populist anti-Euro sentiment and the European elite’s counter-revolutionary moves to maintain the status quo surrounding monetary union. This time round praise and scorn – depending on where one stands on the populist/technocratic divide – have been heaped on the Italian President, whose refusal to nominate the coalition’s proposed finance minister triggered the collapse of the talks.

The problem this time is that political parties have even less to lose in impugning the EU, which is not just associated with the Euro, but also with a lack of support to help Italy manage the ongoing Mediterranean migration crisis. At the same time, reform of economic and monetary union has reached the end of the line in that there is no new consensus for further changes that could mollify anti-Euro demands in Italy. Emmanuel Macron’s proposals for further measures to enhance financial solidarity across the Eurozone have fallen on deaf ears since they were proposed shortly after his election in 2017. The situation could become even more volatile if Italian bonds lose investment grade status – based on risk assessment by credit agencies – in which case the ECB would no longer be able to buy Italian public debt as part of the quantitative easing programme that automatically lowers spreads.

How this drama will play out is far from certain. Much more evident is the way that Italy’s governmental chaos shows the impact of economic monetary union on budgetary politics at the national level. By institutionalizing fiscal consolidation and structural reform the Eurozone has become a post-democratic political space in that there is a narrowing of political choice that in turn breeds resentment because of restricted opportunities for alternative socio-economic policies. The same pattern was discernible during the five years of François Hollande’s presidency, where Macron’s rise to power came on the back of supporting the EU against his Eurosceptic challenger Marine Le Pen. To date, there is no sign of an Italian Macron, which is why this could all end badly for the Eurozone.

by Dr. Andrew Glencross, Senior Lecturer Dept. of Politics and International Relations School of Languages and Social Sciences
Birmingham, B4 7ET, United Kingdom

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