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EU Priorities

How the EU / euro zone should meet future challenges

EU should not set itself up as scapegoat by fining Italy

The EU is trying to deal with two headline issues at present: whether the Brexit deal agreed between the Commission negotiators can be agreed on the one hand by the British parliament and on the other by all 27 member states, the other is whether the Italian government’s budget which has been deemed to breach euro zone rules should be sanctioned and whether it leads to an Italian financial crisis, as would happen if interest rates on Italian government debt continue to rise until they become clearly unaffordable. The Italian crisis differs from the Brexit saga in that Italy is not leaving the EU. Nevertheless the Italian government, especially its most powerful member, the deputy prime minister and interior minister, Matteo Salvini, is hostile to the EU and the overwhelming support in Italy for EU membership until a few years ago has evaporated with only 44% of recently- polled Italians supporting EU membership (although with a lot of don’t-knows, this still exceeds those definitely wanting to leave).

 

In this situation the Commission is danger of setting itself up to be blamed by threatening to fine Italy for non-compliance of the euro zone budgetary rules. This only feeds the government’s narrative that Italy’s woes can be blamed on the EU. In defence of the Commission, it is carrying out its formal duty as defined by the euro zone rules established when the euro was formed, and it is also under pressure from some other euro zone members, such as the Netherlands and Austria overtly  and probably Germany more discretely, to take a hard line. However, the Commission is a political organisation whose duty is not just to blindly enforce rules but to act in the long-term interest of the EU. There is no point in allowing the EU to be portrayed in Italy as a scapegoat. Although so far investors have only higher yields which the government considers affordable, if the government budget plans become clearly unaffordable, investors will at some point refuse to buy government debt so forcing the government to back down. In the meantime the Commission may be right to think that short-term budgetary generosity may cost the Italian public in the longer term. It is entitled to say so but should otherwise stand back.

 

One possible argument for the Commission taking stronger action is the possibility of a government fiscal crisis leading to a banking crisis given that many Italian banks have less strong capital underpinnings than would be desirable. Already higher rates on government bonds have led to higher rates that banks must pay to issue their own bonds. However, banks in other countries have had nine years to rebuild their balance sheets since the euro zone crisis and would be likely to be able to resist. The most vulnerable other country Greece, which has been and continues to comply with strict (many would argue excessively strict) conditions, is still supported through the European Stability Mechanism.

 

The EU is not to blame for Italy’s government debt or general economic problems (some argue that the latter are partly due to euro membership but even if this were so Italy did not have to join the euro). The EU, or more precisely other member state governments, do, however, bear considerable responsibility for the rise of the right-wing Lega based on its hostility  to migration to Italy across the Mediterranean. They did hardly anything to help Italy tackle the issue whether by providing financial support for managing the inflow or sharing those with asylum claims and even blocked migrants crossing borders into Austria and France.  There are no easy answers to how to deal with migrant flows in a way which tries to respect the dignity of these desperate people, but EU countries should try to work together rather than against each other.



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