Lack of European reform, not Italy, will break the eurozone

Stop treating the euro as an article of faith and fight for its sustainability

Wolfgang Münchau


Giuseppe Conte, Italy's prime minister, should stake a strong position at this month’s European Council in the debate on eurozone governance © Reuters

It is unfortunate that so many Europeans treat European integration as an act of faith. The Brexit debate pits Europhile true believers against sceptical atheists, which is why we are talking about the two equally absurd propositions: a second referendum and a hard Brexit.

Italians treat the question of their euro membership in a similar way. You either belong to this camp, or that. If you are, like me, somewhere in the middle, people feel confused. I believe it is reasonable for a struggling country such as Italy to remain in the eurozone for as long as there is the faintest hope that the relationship is sustainable.

It was the unconditional pro-Europeanism of Italy’s past leaders that gave rise to the current nationalist backlash. Previous governments accepted European legislation that was profoundly against Italian interests.

There was the rule to count Italy’s contributions to the European Stability Mechanism, the bloc’s rescue umbrella, as relevant in the calculation of the maximum-allowed deficit. Then the acceptance of a bank resolution law that would leave thousands of Italian savers unprotected. And worst of all, the agreement in 2012 to accept the fiscal compact, which effectively requires Italy to run balanced budgets. If former prime ministers had been more ruthless, the anti-European backlash would be milder.

I find it equally silly for the Five Star Movement and the League to have raised the issue of an all-out confrontation with the EU in the way they did. The idea of asking the European Central Bank to write off Italian debt purchased as part of the quantitative easing programme was mad. The notion appeared in a first draft of the coalition agreement and was later dropped. It is absurd on many levels. For starters, most of the Italian debt is held by the Bank of Italy, not the ECB. If they want to take on the eurozone, they have to smarten up.

My first piece of advice to them is to drop the unilateralism and take a transactional view — setting out conditions that would allow Italy to remain and prosper in the eurozone.

As a first priority, Giuseppe Conte, Italy’s prime minister, should stake a strong position at this month’s European Council in the debate on eurozone governance. Angela Merkel has rejected virtually every substantive part of the reforms proposed by Emmanuel Macron. Mr Conte should consider supporting the French president to impress on the German chancellor the exorbitant costs of a German “no”. Pedro Sánchez, the Socialist party leader who was sworn in on Saturday as Spain’s prime minister, might help strengthen such an alliance.

Mr Conte should make the point that an unreformed eurozone has little chance of survival. Until now, the best argument for Italy to remain in the euro is to hope that the eurozone will eventually be reformed. If we know for certain that is not going to happen, the argument shifts. It is not Italian politics that kills the euro, but a lack of reforms in the eurozone and Germany’s massive current account surplus.

The best way to confront the eurozone policy is from within. Italy could use its weight in the upcoming appointments of the EU’s most important jobs: the presidents of the European Commission, the European Council and the ECB. There are deals and trade-offs to be made. Do not talk about a unilateral exit until all else has failed.

Secondly, the Keynesian fiscal boost outlined by Italy’s coalition government is well intended but too large. They should tone it down and accompany a mildly expansionary fiscal policy with some targeted structural reforms, to the banking sector, the judicial system and public administration.

Thirdly, there is nothing wrong with a genuine plan B, a list of measures to roll out if a crisis makes continued eurozone membership unsustainable. I would be surprised if the previous government did not have such a plan deep in a drawer. But plan A should be resisted: creating a situation that would inexorably lead to eurozone exit. It was suspicions of such a plan that persuaded Sergio Mattarella, the Italian president, to veto Paolo Savona as finance minister.

And finally, do not even think about asking the electorate to cast a vote on Italy’s euro membership. This would be self-defeating for any politician who dares ask the questions. Eurozone exit is an accident to be prepared for, not an outcome to seek. I doubt an Italian government would survive it.

As for the rest of us, we should stop treating this new government as some unexpected shock. The populist government is the logical consequence of 20 years of economic mismanagement by Italy’s centre-left and centre-right parties. That is what caused the mess.

If you are really pro-euro, my advice is to stop treating the euro as an article of faith but fight for its sustainability. That fight cannot be won in Italy alone. It requires big policy shifts in Brussels too.

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