Italy's new populist government really might blow up the euro
Five Star Movement leader Luigi Di Maio, left, and League leader Matteo Salvini. (Fabi Tiziana/AFP/Getty Images)
Stop me if you've heard this one before: A populist government has come to power promising to do things it can't do if it wants to stay in the euro zone, yet it says it doesn't want to leave.
That, of course, is what happened in Greece in 2015, and, as proof that the euro crisis never really ends but, rather, takes a break for a while, that is what is happening in Italy right now. The question, then, is whether this brewing confrontation will turn out any differently than the last one, or whether Europe's threat of financial ruin will be enough to coerce Italy's radicals into becoming the barely willing executors of policies they despise, as Greece's radicals did.
So far, at least, the basic outline has been the same in both cases. Italy, like Greece, has cycled through center-left and center-right governments that haven't been able to get their economy moving again while adhering to the strictures of euro zone policy. Indeed, even accounting for the fact that their working-age populations have both been shrinking, Italy's economy has barely done better than Greece's since the euro was first introduced in 1999, and actually hasn't grown at all since 2004. The reasons for this might be somewhat mysterious — the country's sclerotic small businesses and the red tape that keeps them from getting bigger might have a lot to do with it — but the results, as you can see below, have not been.
Source: St. Louis FRED
Italy, also like Greece, has turned to anti-establishment parties in its desperation. In this case, those are the ideologically inchoate protest party know as the Five Star Movement, which was founded by a comedian a little less than a decade ago and now commands the support of the country's southern and poorer half, and the far-right party the League, which has reinvented itself from being the champion of northern secession to being viciously anti-immigrant. Together, they control a majority of seats in parliament and now form the populist front that neither Berlin nor Paris wanted to see.
That's because, even though they now say they don't want to get rid of the euro, their demands would still mean the end of it as we know it — or, more accurately, as Germany has built it. In particular, they want to be allowed to run much bigger deficits so that they can push through the basic income for poor families on which the Five Star Movement campaigned and the mostly flat tax that the League backs, as well as undo the tighter pension rules that the country was all but forced to implement back in 2011. Creditor countries like Germany are worried that this will end with having to bail out the Italians at some point, or with the European Central Bank buying so much more of their debt (which it's already doing) that it finally makes inflation wake up too much from its very extended slumber. Why can't Italy just be more like them, they wonder, never mind that not everyone can a lender be. Somebody has to borrow.
It sets up an extremely unbalanced game of chicken. On the one hand, Italy is at Europe's mercy, because it depends on the ECB to keep its banks afloat and its borrowing costs down. Which is to say that if it ever did something it's not "supposed" to, like deliberately running a bigger deficit, then the ECB could crash its economy by pulling the plug on its financial system as it did in Greece. On the other hand, doing this would potentially put Europe at Italy's mercy, because at that point it would have little to lose by leaving the euro, in all likelihood setting off a contagion that would engulf everyone else. Maybe most important, though, is that this would be a much bigger threat than it was when Greece tried it, because Italy's economy is so much larger. Europe was confident that it could contain any fallout from a Greek exit — that, in part, is why it was willing to take such a tough line — but it's doubtful that it could with an Italian one.
Europe has the advantage here to the extent that it doesn't have to hurt itself to hurt Italy, but it also has more to lose, with 66 years of integration potentially going to waste. Now, it's true that Italy's populist parties probably don't want to be seen as pushing things that far — its people are still plenty fond of the euro — but they would be more than happy to do so if it looked like Europe was doing the pushing. Like most games of chicken, this is one that's best not played.
It's easy to get caught up in trying to game this all out, but the bigger point is that this is happening again. It was one thing when it involved Greece, since Europe could tell itself that it never should have been allowed in the euro zone in the first place, and, as a result, its problems were sui generis. But what about this time? The euro zone is recovering right now — in fact, last year was one of the best it has had in a long, long time — and yet its third-largest economy is still rebelling against a system that doesn't seem to work for it, no matter what. The euro crisis, in other words, might have started out as a financial crisis that begot an economic crisis, but, in some parts of Europe, it's still an economic crisis that's now begetting a political crisis — which, if they're not careful, could cause, yes, another financial crisis. It's the circle of life (or rather death) of a poorly thought out currency. And it's going to get worse whenever the next recession hits unless they change the rules so that everyone can grow better.
It didn't happen the first time, and it might not happen this time, either, but eventually, if the euro keeps giving the continent's populists so many chances, they will kill it.
It'll be deja vu all over again — just don't ask me which language it will come in next.
A chart and sentence have been updated to examine Italy's economic performance in terms of GDP per working-age adult, instead of GDP per capita, to control for its aging population.