Crisis in the Bel Paese: Malta’s Italy watchers on the EU’s existential problem

The eurozone will undoubtedly be negatively affected if Italy’s politicians persist in their refusal to budge on Budget changes demanded by the European Union, economic and political experts told MaltaToday

In an unprecedented move, the EU this week sent back the Budget proposals submitted by Italy
In an unprecedented move, the EU this week sent back the Budget proposals submitted by Italy

The risk of Italy’s refusal to change its economic policies following the rejection of its Budget by the European Commission, will spill over to the eurozone and Malta – perhaps leading to existential questions about the European project itself.

In an unprecedented move, the EU this week sent back the Budget proposals submitted by Italy, the eurozone’s third-largest economy, saying they violated fiscal laws.

The Budget which proposes a 2.4% deficit ceiling – below the 3% maximum allowed by the EU, but still breaking Italy’s promise to cut its deficit to curb its stratospheric 130% of GDP debt level – poses unacceptable risks to the single-currency area, the European Commission told Italy on Tuesday.

But the Italian populist government, which includes the centre-right Five Star Movement (M5S) and far-right Lega, has steadfastly said it would “not give up” on its plans.

Deputy prime minister and M5S leader Luigi Di Maio said on Facebook that if Italy were to “surrender”, it would quickly go back to “the pro-bank and pro austerity ‘experts’”.

“And so we will not give up. We know that we are on the right track. And so we will not stop,” Di Maio said.

Home affairs minister and Lega leader Matteo Salvini replied in similar vein: “Let the speculators be reassured, we’re not going back,” he said.

In comments to this newspaper, former Bank of Valletta chairman John Cassar White* said the non-acceptance of the Budget showed both Brussels’ obligation to uphold Maastricht rules, but also the populist Italian government’s right to carry out its mandate.

Describing an Italian financial crisis as a potential “existential” problem for the EU, he said the Commission must deal with the matter, or risk the collapse of the eurozone. “The Commission is in a fix. Italy is the first major country in the eurozone area that is defying the authority of the Commission by blatantly ignoring agreed fiscal rules. On the other hand, the Italian government has a clear political mandate to put an end to austerity.”

Cassar White said that in the “likely” possibility that the Italians do not budge and push on with the implementation of its Budget measures, the Commission would eventually impose monetary sanctions against Italy. “It is more than probable that the new Commission [due to be appointed in 2019] will have to deal with this situation. The biggest risk is that other EU member states will consider Italy’s stand as a precedent when they find themselves on the receiving end of their electorate’s anger and frustration in tough economic situations,” he cautioned.

“The next year will be a major test for the EU’s quality of leadership. The eurozone will implode if the EC once again kicks the can hoping that the Italy issue will resolve itself. The Italian financial crisis could well prove to be an existential problem for the EU, which has been limbering on from one crisis to another without tackling fundamental governance reform.”

Burning down the house

Compared to other eurozone members, Italy’s economy is huge, University of Malta economist Philip von Brockdorff underlined, with only Germany and France being bigger.

Any macroeconomic problems created by an Italian Budget that goes against the rules of the EU’s stability and growth pact will have an impact on the euro area, especially considering the state of the vulnerable economy right now.

“If you have a similar situation in Italy as there was in Greece… this shows the vulnerability of a common currency, where monetary policy is still centrally devised, but fiscal policy is still in the hands of the member states,” he said.

When it comes to Malta, any instability in the eurozone would affect our island, Von Brockdorff said. “We cannot forget that Italy is one of Malta’s biggest trading partners. If there is an economic crisis in Italy – in an economy which to date has not managed to reach the same level of growth it had before 2008 – this will bring the eurozone down as well, because of the sheer size of the Italian economy.”

Turning to the wider picture, the economist said that another recession was on its way.

“After the 2008 recession, we had a recovery, and we’ve now reached the end of that. I think we are now heading towards another global downturn,” he said, “The signs are there already and the level of debt of many countries worldwide has actually continued to grow.”

Von Brockdorff said markets are losing their value because there is fear of another worldwide recession.

“It may not happen this year, but it will be happening in the next couple of years, if not earlier. If you have this wider situation – which makes the eurozone weaker because of it – when serious problems in Italy are added to it, there is the risk of a major crisis. Everything is part of a chain,” he warned.

“That is why the Commission is intervening in Italy’s case. But then people say it should mind its own business,” Von Brockdorff remarked, surely an observation on the eurosceptic climate it faces in Italy.

Budget could be unconstitutional

The EC’s request for a revised Budget, which has to be completed within three weeks, is a historical first and one former Italian MP – the former AD chairperson Arnold Cassola – says the effects will be felt on Malta.

Cassola, an MP for the centre-left between 2006-2008, said it’s a situation that causes more problems for the EU at a time when Europe is not in many Italians’ good books.

“There might, on the other hand, also be an issue of unconstitutionality… in 2012 Italy adopted the EU’s fiscal compact into the Italian constitution. So, for the past six years, it has been part of constitutional law. There is internal opposition to the Salvini Budget because of this matter,” he said.

Cassola has warned that Italy cannot be made to suffer austerity measures as had been done in Greece. “The right balance has to be found between a reasonable Budget which does not go much beyond the targets, but also ensuring there is enough maneuvering space to be able to create work in a country which has a big problem with unemployment, especially among young people.”

Contrasting with Cassar White’s opinion, Cassola was hopeful that good sense would prevail and that Italy would carry out changes to its Budget. “I think there might be some corrections, because Finance Minister Giovanni Tria, who happens to be more or less a moderate, has said some changes have to be affected,” he said.

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