Italy debt is EU’s major concern following Greek landmark
This week saw the political milestone event of Greece officially completing an eight-year bailout program following an economic collapse on the scale of the Great Depression. Yet, important as this moment could be for Athens and the EU at large, several European nations — including G-7 member Italy — continue to have difficult debt problems that could paralyze the euro zone once again, both politically and economically.
Today it is Rome, not Athens, which arouses most economic alarm in Europe, following Italy’s inconclusive general election this year that proved to be the midwife for a populist coalition of the political right that could yet shake up Europe. Rome is now perceived by some to pose perhaps the biggest threat to the euro zone’s future because the country has the second biggest debt load in the single currency area after Athens (at more than 130 percent of GDP) and its banking sector remains under stress thanks to big under-performing loans.
Moreover, Italy, unlike Greece, has long been at the political core of the European project as a key G-7 nation that has the third largest euro zone economy. This is why a crisis in Italy could be several magnitudes more concerning, both politically and economically, for Brussels than has been the case for Greece.
In this context, Greece’s economic recovery in recent quarters is a ray of sunshine for the continent. When the third and most recent €86 billion tranche of bailout money was agreed in 2015, following the longest ever (17 hours) meeting of leaders of the euro zone, European Council President Donald Tusk described it as “the most critical time in our (EU) history,” given the then-growing possibility that Athens may have needed to leave the euro zone.
Even with the bailout package, Greece was still facing into the biggest potential political and economic maelstrom since the nation emerged from military rule in 1974. The country had just experienced its fifth general election in six years, with the Syriza party winning most seats, but falling slightly short of an overall majority, raising concerns over its governance.
Syriza, the first radical left party to win power in the EU in years, comprises a broad spectrum of political activists, including socialists, anti-fascists and anti-globalization campaigners, and this loose grouping only came together as a single political entity in 2012. Three years later, the government faced an exceptionally tough political period because of significant intra-party tension as it implemented the bailout deal, leading to several splits, including when a number of its parliamentarians broke away to form Popular Unity, a new anti-austerity party of euroskeptics. The stringent bailout package was widely politically unpopular in Greece and roundly criticized by former Syriza Finance Minister Yanis Varoufakis as a “new Versailles Treaty.”
The forthcoming national budget in Rome could become a major test of how serious the populist administration is of taking on Brussels over the EU’s budgetary rules.
Yet, for all the political and financial pain Greece has endured in the last decade, and its success in paying off its bailout package, the nation continues to labor under indebtedness of around 180 percent of GDP, and may still ultimately need to leave the euro zone. While this possibility has been forestalled for now, the option could well come back on the political radar in the coming years, especially if the economy falls back into deep recession.
Yet it is Rome, rather than Athens, where concerns over European debt are now turning. The fear here is not just over the populist political stripe of the coalition, but also that it may well be weak, unstable and incapable of securing the structural reforms that the country badly needs, raising the prospect of further political paralysis in a country that has seen more than 60 national governments in the post-war era.
Of most immediate relevance is that the new Italian government is preparing its annual budget — to be finalized this fall — with Five Star and the League wanting to see significant new spending to address voter concerns over the continuing fragility of the economy, with double-digit unemployment and low growth. Indeed, GDP per head is estimated now to be less than in 1997 at constant prices: Only Greece has fared worse in the euro zone during this period, which has fueled the political success of the two anti-establishment parties now in power.
Only this week, Italy had asserted that its response to the tragic Genoa bridge collapse will be a “Marshall Plan” of up to a reported €80 billion aimed at restoring the country’s infrastructure. The plan potentially also offers the government the opportunity to open the floodgates of wider fiscal stimulus and boost Italy’s economy in other areas.
Other key political priorities for the government include the possibility of a new flat tax, and introducing a universal basic income. This is a package, welcome politically as it would be in some of Italy, which would add to tensions with Brussels, as it could mean Rome will drive a coach and horses through the euro zone stability and growth pact (under which governments keep budget deficits below 3 percent of GDP). The League and Five Star have long criticized the pact.
With the EU refusing to blink, so far at least, over its longstanding budgetary rules, political relations could deteriorate badly in the coming months. And this in a context where the League’s leader, Matteo Salvini, has previously asserted that he wishes Italy to leave the EU, while Five-Star has called for a referendum on whether the country should keep the single currency.
Taken overall, Greece’s milestone comes as political and economic risks over Europe’s debt are increasingly focused on Italy. The forthcoming national budget in Rome could become a major test of how serious the populist administration is of taking on Brussels over the EU’s budgetary rules, which could yet lead to a new crisis in the continent.
- Andrew Hammond is an Associate at LSE IDEAS at the London School of Economics.