Judy Dempsey– Carnegie
A selection of experts answer a new question from Judy Dempsey on the foreign and security policy challenges shaping Europe’s role in the world.
Federiga BindiSenior fellow at the School of Advanced International Studies at Johns Hopkins University, director of the Foreign Policy Initiative at the Institute for Women’s Policy Research, and D. German distinguished visiting chair at Appalachian State University
Periodically, media headlines ask: Is Italy the sick man of Europe? The country seems perpetually on the brink of collapse, yet it never crumbles. Resistant to change at all levels, Italy displays an incredible amount of resilience—even though the word does not even exist in the Italian language.
Italy does not have an education-based meritocratic system like France, making it unlikely that an Italian answer to French President Emmanuel Macron will emerge. In the United States, wealthy parents pay for their offspring’s (expensive) education; in Italy they pay for a house, invariably near mom’s.
In fact, these older parents are Italy’s real problem, particularly the so-called baby pensionati: mainly civil servants (including teachers) who from the early 1970s to the early 1990s were allowed to retire in their forties—with pensions often superior to those of today’s white-collar workers—and who have since enjoyed the dolce vita at the expense of Italy’s public deficit. Because their economic stability is used to help the lives of their now-adult progeny, who often cannot afford a decent life with Italy’s poor salaries, the problem is hardly debated. Yet, it is there, growing year after year. Italy may not have collapsed yet, but it may well do soon.
Marta DassùSenior director for Europe at the Aspen Institute and editor in chief of Aspenia
Italy will remain Europe’s weak link until the next parliamentary election. Seen from the perspective of the markets, the political risk in Europe has shifted from France to Italy. And with good reason: given Italy’s failed electoral reform, it’s unpredictable whether Euroskeptic parties will be in government after the election. Moreover, Italy appears complacent of its status of too big to fail and has lost reform momentum at a time when the economy remains fragile and the European Central Bank’s quantitative easing is about to be phased out.
However, letting the situation derail in the eurozone’s third-largest economy is a systemic risk. So, Brussels will grant Italy breathing space for a little longer, as confirmed by the EU’s green light for the Italian government’s recent bailout of two regional banks. It is a controversial (albeit small) bailout that shows both the price of Italy’s belated approach to banking reform and the inadequacy of European arrangements. As a consequence, an efficient banking union becomes politically more difficult but even more necessary.
There is a difference, however, between being a weak link and being Europe’s Achilles’ heel. Italy plays a key role in managing migration flows. And reforms are difficult in other countries, too—including France, with its structural deficit.
Stefan LehneVisiting scholar at Carnegie Europe
In terms of managing migration, it certainly is. The daily crossing of hundreds of mostly African migrants and refugees from Libya to Italy represents the most visible inflow into Europe. Absorbing the number of people who would fill two large football stadia (180,000 in 2016) should not be an overwhelming problem for the EU, with its 500 million people. After all, the figure amounts to only a small fraction of the more than 2 million migrants who arrive in the EU every year.
The real relevance of the issue is political. The challenge is emblematic of the breakdown in trust and solidarity triggered by the 2015 refugee crisis. Italy feels left alone by its EU partners, and public confidence in the EU has massively declined. Other EU governments complain that Italy is allowing migrants and refugees to move to other countries, in breach of EU rules. EU negotiations on a burden-sharing mechanism are stuck, and Italy’s efforts (with the EU’s help) to stem the flow through deals with the Libyan coastguard and tribes in the south of the country have so far not delivered.
Given its geographic position, Italy will always be particularly exposed to population flows from the South. But if the EU’s Schengen passport-free area is to survive, the responsibility for managing this challenge needs to be shouldered by the EU collectively.
Denis MacShaneSenior adviser at Avisa Partners
In the week the news came that British taxpayers have to find €1.14 billion ($1.30 billion) to bribe a handful of extremist anti-Catholic members of parliament from Northern Ireland to prop up UK Prime Minister Theresa May’s minority government, it is hard to see Italy as a special basket case in Europe. Britain has had four major elections or referenda in less than forty-four months, with a bewildering change of ministers. Italy is a haven of political stability by comparison.
Failed banks with nonperforming loans are being put out of their misery. Italian growth is twice that of the UK, and inflation is lower. Italy has always been a nation but never a state. The problem—as always in Italy—is that north of Rome the economy seems strong, the cities handsome, the landscape well-tended. But head south and the Italy of poverty, corruption, and criminality seems ineradicable. Then again, has Germany brought its Eastern regions up to the same living standard as pre-1990 West Germany?
Politics is shaky in any number of EU member states, with fluid coalitions, populist nationalists, and separatist ideologies all intermingled. Italy will limp forward, but Europe as a whole needs reform and new economic energy. Saying just one EU member state is at fault is wrong.
Andrea MammoneLecturer in modern European history at Royal Holloway, University of London
Italy is not the most problematic country in the EU, nor is there an imminent crisis approaching. Former prime minister Silvio Berlusconi’s years were much more difficult. This does not mean that the nation is perfect, but it has already been through a number of crises and is still a main actor in European and Mediterranean politics. There are problems with the banks, but Italians are not used to a culture of debts.
It is also too early to predict a victory for the demagogic Five Star Movement in the next general election. It is not even clear which electoral system will be used for the vote and how this will influence future parliamentary majorities and possible government coalitions. What is preoccupying—and often overlooked by international observers—is the potential role of the far-right xenophobic Northern League as the leading force in the moderate center-right alliance (which includes Berlusconi). This coalition won the Italian local elections earlier in June.
Looking across Europe, more worrying are the EU’s failure to manage refugee flows, Brexit, and the right-wing shift in places such as Hungary. All these developments are challenging European values such as unity, tolerance, and solidarity.
Cas MuddeAssociate professor in the School of Public and International Affairs at the University of Georgia and co-editor of the European Journal of Political Research
By now it should be clear that Europe’s much-hyped Patriotic Spring is not coming, at least not in 2017. So Europeans can finally devote their attention to the real Achilles’ heel of the eurozone, and therefore of the EU: Italy. The Italian economy has long been problematic, held together by nationally doctored numbers and international trust in an ever-decreasing group of Italian politicians.
Today, the only Italian politician to still have the trust of the international community is former prime minister Matteo Renzi, although he did much to undermine that trust by creating a political crisis in 2016. The alternatives are a motley crew of populists, from the radical-right Northern League of Matteo Salvini through the center-right Forza Italia of the seemingly immortal Silvio Berlusconi to the idiosyncratic Five Star Movement of the erratic Beppe Grillo. Not only are these populists distrusted by the international community, but they have also all flirted with the idea of holding a referendum on Italy’s membership of the eurozone.
If the third-largest economy in the eurozone, a country that is fighting a major banking crisis, is judged on its real economic performance rather than its potential, the EU will be in deep trouble.
Francesco PapadiaSenior resident fellow at Bruegel
The sad answer is yes, Italy is Europe’s Achilles’ heel. Among the large eurozone countries, Germany remains a bastion of solidity, Spain is growing strongly, and new prospects have opened up in France after the 2017 presidential and parliamentary elections. Meanwhile, Italy continues to deliver mediocre economic growth and faces an uncertain political future.
One should not underestimate Italy’s Houdini-like ability to free itself from self-tied knots. This ability will again be tested: Will Italy, against unfavorable odds, deliver a clear political commitment to the EU and a program of structural innovation to achieve a higher growth trajectory? Both actions would end the illusion that fiscal deficits are necessary for growth and would thus remove Rome’s insistence on begging for flexibility on its public accounts.
The problem is that it is not clear who can deliver these accomplishments. More fundamentally, it is doubtful that they can find support in the population. Once again, Italy bumps into its limits: a wonderful country with poor governance. It may become necessary to resort to an external constraint, this time under the guise of the troika composed of the European Commission, the European Central Bank, and the IMF.
Gianni RiottaMember of the Council on Foreign Relations
Italy is a country of countries, as it always was. There are areas in northern Italy growing faster than Germany. There are cities in southern Italy in worse shape than Greece. Italian fast trains from Naples to Milan are quicker than those from Berlin to Munich, yet in my native Sicily, train travel reminds one of a sleepy García Márquez novel.
Italy’s main problem is not its awful public debt, accumulated in the 1970s and 1980s by a rapacious ruling class. The real national disease is the dominant aversion to innovation, the languid nostalgia for the dolce vita, working 9–5, retiring at fifty-five, having it all and in style. Italians complain but in the end reject reforms, whether from the Left or the Right.
So is Italy a basket case? Will the populist Northern League or Five Star Movement win the next general election, humiliating former prime minister Matteo Renzi and paving the way to a withdrawal from the eurozone and EU? Don’t bet on it. Traditionally, Italians talk their way close to the abyss but revert to their ancient common sense at the last step. Private debt is low, families save and run their own welfare systems, and the best companies export and compete in the globalized world. So, as U.S. baseball player Yogi Berra used to say, “It ain’t over till it’s over.”
Rachel SandersonMilan correspondent at the Financial Times
The injection of €5 billion ($6 billion) of taxpayers’ money into two failing banks in Italy’s northeastern Veneto region is the latest episode in a slow-motion banking crisis in the eurozone’s third-largest economy. Rome hopes the move will bring closure to a two-year period that has seen Italy scramble to plug one troubled bank after another—invariably having delayed confronting the problems due to political motivations.
The deal to liquidate Banca Popolare di Vicenza and Veneto Banca under national bankruptcy law (with Italy’s largest bank, Intesa Sanpaolo, taking the good assets for a token price) follows a precautionary recapitalization deal for fourth-largest lender Monte dei Paschi di Siena and the closure of four small banks in central Italy.
Officials believe the deal for the Veneto banks, which lost 40 percent of their deposits in eighteen months after a misselling scandal, prevented a worse scenario of a bank run or a vote-losing haircut for senior bondholders, many of whom were retail investors. Midsized Genoese bank Carige is now considered the only significant lender that needs to be shored up or wound down.
Still, Italy’s banking system remains weighed down by low economic growth and €200 billion ($227 billion) of gross bad loans, which will continue to crimp profitability and lending.
Nathalie TocciDirector of the Institute of International Affairs in Rome
Europe and Europeanists sighed with relief after the Austrian, Dutch, and, above all, French elections in late 2016 and early 2017. With no serious threat posed by the German parliamentary election in September, next in line is Italy, which is due to go to the polls by May 2018. Here the going gets rough, again.
Speculating about the possible result just under a year out is unwise. But a snapshot of Italy’s current political panorama shows the country split, more or less equally, between the center-left, the center-right, and the populist and Euroskeptic Five Star Movement. Were the movement to forge a coalition with the Northern League, they could well have the numbers to rule.
In such a (nightmare) scenario, what might happen? Directly, not much. Italian state institutions are used to managing bad politics. Their ability to contain the damage by preventing the implementation of potentially dangerous decisions (for example, a referendum on Italy’s membership of the eurozone) is far stronger than in most other EU member states.
Italians know this well. But foreigners do not, and here’s where the danger lies. Fearing a dramatic volte-face by a new government, the indirect effects could be catastrophic, with spreads soaring once again and the eurozone’s governance still fragile and incomplete. This highlights the urgency of reigniting work on the EU’s economic governance as soon as the German election is over.
Paweł TokarskiSenior associate for eurozone stabilization and reforms at the German Institute for International and Security Affairs (SWP)
Problems with the banks, a high level of public debt, structural rigidities, and a difficult social situation make the third-largest economy in the euro area highly vulnerable to external shocks. Public debt in Italy is expected to rise despite the current favorable economic conditions, provoking the question of its future sustainability.
However, the most significant risk factor persists in Italian society. According to opinion polls of the European Commission, support for the euro in Italy is the lowest in the euro area after Cyprus. The society that was most enthusiastic about the euro, as Italy was at the end of the 1990s, has turned into one of the most skeptical. In public debates, the euro is described as the main cause of the country’s domestic economic problems. But it was the domestic political elites who failed to implement a broader modernization agenda in parallel to eurozone membership. Current GDP per capita is below the level before Italy’s accession to the eurozone, and young Italians pay a disproportionately high price for the country’s economic difficulties.
There are no Macrons on the horizon in Italy, and future political choices are likely to lead to more muddling through at best.
Antonio VillafrancaResearch coordinator and head of the Europe Program at the Institute for International Political Studies in Milan
Italy has two long-standing economic problems. First, it has piled up huge amounts of public debt, which today stands at over 130 percent of GDP. Second, productivity dynamics have constantly underperformed vis-à-vis key European players. From 1979 to 2012, Italy’s labor productivity increased by 43 percent against Germany’s 84 percent—although recently, the gap has been shrinking.
These two problems are closely interconnected. Debt as a percentage of GDP cannot be brought down simply by reducing public spending. Quality of spending (from current expenditure to investment) and structural reforms are key to improve productivity and competitiveness. But all this takes time, and time is crucial. Today, simple cuts in public spending would play into the hands of populist and anti-establishment movements.
The recent bailout of two Italian banks, which avoided an EU law on bank resolution, should also be read in this perspective. This is not to say that the resolution directive should not be fully implemented. But the peculiarities of the Italian economy make it necessary to consider a transitional period while Rome implements sound policy reforms and strengthens the banking system.
Some positive signals are already visible: the IMF has raised Italy’s economic growth forecast for 2017 from 0.8 percent to 1.3 percent.