Italy Vs Europe: The Infinite Tension Between Rome And Brussels

Yet another political crisis between Rome and Brussels has been unleashed.

By Nicola Leone

When the Italian government announced the budget law for 2019, a new political crisis between Rome and Brussels has been unleashed. The so-called DEF, the document of economy and finance, contains the reform on the retirement age, a flat tax for some categories of independent workers and the citizen’s income, as well as an integrative revenue for retired people.

All this sounds pretty great for a country dealing with growing impovershiment, except there’s a problem: the Italian government agreed to set a 2,4 percent deficit-GDP target. This is making the European Union increasingly concerned about a new financial crisis in Italy or at least about the recurrence of some economic problems that were supposed to disappear in the long period.

An unfair blame game

In these last few weeks, European Commission president Jean Claude Juncker and European commissioner for Economic and Financial Affairs Pierre Moscovici are debating with Matteo Salvini and Luigi Di Maio, the two majority leaders and masterminds of the Italian executive. While the first ones are trying to convince by hook or by crook the deputy prime ministers to change their mind and make a lower deficit rate, the latter, each time they are asked, repeat that they are not willing to review the budget law.

Therefore, the spread — namely the difference between 10-year Italian bond and the benchmark 10-year German bund reached 311 basis points in the last few days, when in March it was close to 100 basis points. If the spread is high, Italy is spending more in paying its debt back. On top of that, Conte’s government declared that it is going to spend almost 40 billion, basing the deficit-GDP ratio forecasts on naive optimistc views. Indeed, Giovanni Tria, Italy’s minister for Economic Affairs, wrote in the DEF that with these measures the country is expected to grow by 1,5, 1,6 and 1,4 percent respectively in 2019, 2020 and 2021.

Italy Europe Brussels

Although the European Union sometimes goes too far predicting catastrophies, so pushing many Italians to reject the memebership of the Union and to desire a return to the old Lira, this time we cannot play the blame game, as the coming up problems cannot clearly be ascribed to Brussels and its austerity policies.

Italy’s GDP growth since 2008

The first question we must ask ourselves is: do we really think that the European Union would gain something out of the decline of Italy? Plus, are we sure that European policies are damaging Italy? The answer is no. First, running deficit is a good choice only in extreme cases, when you have to use investements as your last chance in trying to offset a cataclysmic economy instead of waiting for its collapse. The objection often brought here is that Italy’s economy is very close to a collapse. However, facts show that risking so much is not worth. Actually, albeit the country lost a considerable amout of GDP points and remains below the pre-crisis level, it is still the world’s 9th largest economy and the 12th if we consider the PPP (Parity Purchasing Power).

Nonetheless, productivity is decreasing, as you can see in the self-explanatory graph below. These data have to be matched also with the fact that Eastern European countries and the BRICS (Brazil, China, Russia, India and South Africa) have been growing steadily until a couple of years ago. Thus, the decline in Italy’s productivity is due to two main factors: a cheaper labour market on one hand, and the lack of innovative businesses that, even though they exist, are a small presence in relation to the other G7 countries.

Italy Europe Brussels

Another great problem for the future of the country is one of the highest public debts in the world: this would not be a major issue if there was a clear growth to compensate, but this is not happening anytime soon. What a responable government is supposed to do is thus trying to reduce as much as possibile the debt by cutting useless or marginal costs. Easier said than done, as in politics it is an expensive and thankless task, especially when the citizens’ quality of life is being touched. However, everyone noticed that blindly following the austerity way without exception is not so wise either, and Greece is considered the best example of its damages.

Finally, the Italian banks are suffering because of the NPLs (nonperforming loans), banks’ credits which debtors are not able to solve. Although the overall number of NPLs is gradually going down, Italy’s rate is remarkable higher than the other G7 members.

A bleak future can still be prevented

In view of all this, nobody’s really sure where these policies are leading the penisula, but it seems open and shut that they are aimed at today’s citizens, and then let the future ones struggle with their uncontrollable effects. Italy is not a poor country and is nowhere near to that. However, a country in constant recession risks to be considered relatively poor someday, while its citizens are already heavily affected today. The European Union, for its part, is trying to contain the public expenditure in order to guarantee a long-term stable growth. Brussels wants Italy to be economically safer and more reslient to another financial crisis which is expected for 2022, because the more its public debt grows, the more the third economy of the Union is becoming fragile, with all that this entails.

At this point, we can only hope that the so-strongly-welcomed growth will actually happen. If it doesn’t, Italy will deal with much bigger problems than it has right now.