In late October, Italy’s populist government finally got its showdown with Brussels. In September, Italy’s powerful deputy prime ministers, Lega leader Matteo Salvini and Five Star Movement leader Luigi Di Maio, agreed on a draft budget calling for tax cuts and a minimum income for the unemployed, both of which would increase Italy’s deficits at a time when Brussels is pressuring Rome to reduce its debt load. Now Salvini and Di Maio expect European institutions to make concessions instead. It is hard not to imagine that this was their plan all along.
Salvini and Di Maio know that the European institutions will have to push back on any attempt to break the rules for macroeconomic policy coordination across countries—and specifically those rules that force Italy to rein in its debts and deficits. In turn, Salvini and Di Maio plan to argue that Brussels is preventing them from fulfilling their democratic mandate.
This kind of rallying cry will play well in the run-up to the May 2019 elections to the European Parliament. The danger is that it will play badly in financial markets. If market participants start to worry that Italian public debts will begin growing again, they will become less willing to lend to the Italian government, and every Italian will find it more expensive to borrow. This could create a self-fulfilling dynamic leading Italy back into crisis, particularly if the government’s policies undermine confidence in the country’s banks. Hence the European Commission (EC) must seek to enforce the rules—not just for their own sake but to safeguard the European economy as a whole.
The showdown between Brussels and Rome began in earnest on October 18, when European Commissioners Valdis Dombrovskis and Pierre Moscovici sent a strongly worded note to the Italian government making clear their “serious concern” about the budget’s “significant deviation” from Italy’s prior commitments to lower its debt and deficits. Usually, such a letter would prompt the start of negotiations between
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