Thirty years ago, two Italian economists, Francesco Giavazzi and Marco Pagano, published a paper explaining why governments would bind themselves to international economic agreements that constrain their policy choices. External constraint, they argued, was the price for credibility. By tying their own hands, policymakers communicated to markets that they were committed to responsible but painful and potentially unpopular policies. And by shaping market expectations, policymakers made it easier and less costly to achieve their own domestic goals.
For roughly two decades, running from the late 1980s until the start of the global financial crisis in 2008–09, Italian policymakers have used that notion of external constraint—in Italian, vincolo esterno—to introduce substantial reforms to pensions, labor markets, and government finances. As prime minister, Romano Prodi even used vincolo esterno to help Italy meet the requirements to join the euro.
Yet Italy’s new government, an alliance between the left-wing populist Five
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