Euroskepticism

Italy resigns itself to the euro but risks remain

Rome’s EU partners will have to tread carefully to tamp down Euroskepticism.

By PIERRE BRIANÇON

 Italian politicians may have toned down their rhetoric on the euro and backed away from calls to leave the club. But that doesn’t mean the country is no longer a risk to the common currency zone.

The next government, and its European partners, will have to tread carefully. Italy, weighed down with one of the heaviest debt loads in the European Union, is still too big to be allowed to fail.

And the feeling, widespread in the country, that membership of the euro is a straitjacket, could still come back to haunt the eurozone.

For now, the mood toward the euro remains complex and contradictory: By and large, Italians are obsessed by its constraints, indifferent to its benefits, but in no mood to depart.

That’s reflected in the political rhetoric ahead of the country’s March 4 election.

Even the anti-establishment 5Star party has dropped its calls for a referendum on eurozone membership, except as a “last resort.”

If the parties stick to their lavishly loaded electoral platforms — former Prime Minister Silvio Berlusconi, for instance, has promised a flat tax and €1,000 a month minimum income to all Italians — there will be reason to doubt that the next government will be able to keep spending under the EU threshold.

But nobody will be surprised if politicians climb down from untenable policy proposals after an election.

For now, the Italian economy is helping: Growth in the country may be the weakest of the eurozone, forecast by the EU as 1.5 percent this year, versus 2.3 percent in the monetary union as a whole. But the recovery, entering its fourth year, is starting to feel tangible as it translates into jobs, notably for the youth.

And yet it’s still too early to breathe a sigh of relief.

The Italian recovery has helped voters to forget about the euro’s constraints, but they remain wary. In the last 10 years, Italians have become among the most skeptical in the common currency zone about the euro’s benefits.

According to the EU’s latest Eurobarometer poll, 40 percent of the country still thinks the euro has been “a bad thing for [their] country,” versus 25 percent in the whole of the eurozone.

Former Italian Prime Minister Enrico Letta points out that for his countrymen, the euro has meant living under economic and financial discipline that tended to be ignored before the creation of the monetary union in 1999.

If Italy is now the European country with the heaviest public debt load after Greece (at 130 percent of GDP), this is not mostly due to a decade of financial turmoil, but due to lavish spending and commitments made well before the crisis hit.

Today, that indebtedness poses a threat. The country’s economy is now at a point where the debt load is an impediment to faster growth. Italy also has other problems — notably high labor and pension costs — and it will struggle to cut debt while putting in a place a serious public investment program designed to spur growth.

The future government, whatever its political flavor, will need all the help it can get from its European partners to prevent the return of euro-hostility.

There are two ways the EU can be of assistance.

The first would be for the European Commission to extend Italy the full flexibility allowed by the stability and growth pact, letting it spend more freely.

Unlike France, for example, Italy hasn’t been a repeat fiscal offender. Its budget deficit has stayed under the 3 percent limit ever since 2013 and before that, in the first five years of the financial crisis, it was well under the eurozone average.

The massive debt load remains a problem. But the spur to growth provided by fiscal flexibility could help lighten it.

The second way Italy’s neighbors could help would be for France and Germany to involve Rome in their so-far exclusive talks on eurozone reforms. This is especially important because many ideas on the table — including a more powerful bailout fund, a banking union, and the possibility of restructuring sovereign debt — are being discussed with Italy in mind, notably on the German government’s side.

Already, there is a feeling in Rome that Paris, eager to clinch a deal, has become a bit too close to Berlin. And Italian politicians and economists are contesting much of what has been floated by Emmanuel Macron and Angela Merkel.

Italians are slowly coming back around to the euro. Now it’s up to France and Germany to ensure that their doubts don’t creep back up again.