Italy’s defiance threatens new EU crisis

Italy's cabinet ministers celebrate after announcing budget plans, 27 September 2018

Italy’s ‘populist’ coalition government made up of the Five Star Movement (M5S) and Lega has defied the European Commission’s warnings that increasing its budget deficit to 2.4% of gross domestic product (GDP) would be an economic disaster. It now faces the threat of unprecedented disciplinary sanctions, with the Commission warning on 21 November that Italy risked ‘sleepwalking into instability’. Nonetheless the government insists it will go ahead with its proposed rule-breaking budget for 2019. RUBY MOST reports.

This free-spending budget means Italy would fall foul of EU fiscal regulation which the Commission enforces. It would take the country dangerously near to the 3% of GDP limit demanded by the EC, and risks increasing Italy’s vast public debt, which at 131% of GDP is the highest of any country in the Eurozone other than Greece. European Commission rules require a public debt of no higher than 60% of GDP.

There is massive wealth inequality in Italy, which is the third largest economy in the Eurozone. In 2017 it had the tenth largest exports of any country at $499.1bn. Yet the poorest 40% of the population only have 3.7% of the country’s wealth, while the top 30% have 75%. Italy also has the third highest rate of unemployment in the Eurozone – last year youth unemployment reached 37.1% and 5.06 million Italians were living in absolute poverty. In a letter to the commission on 13 November Italian economy minister Giovanni Tria argued that although the budget would break EU spending rules, it was necessary ‘because our [gross domestic product] remains well below pre-crisis levels and the most disadvantaged sectors of Italian society are experiencing dramatic economic conditions’ (Financial Times 14 November 2018).  Italy’s reactionary and racist coalition has harnessed the anger of Italians at EU-enforced austerity implemented by the previous Democratic Party government and directed it towards immigrants and the supposedly ‘pro-immigration’ EU. Though its 2019 budget – which is estimated to cost between €65bn and €100bn – may sound radical, it will do nothing to improve the lives of those ‘disadvantaged sectors of Italian society’, the poorest sections of the working class including immigrants and refugees, who are suffering most under the global capitalist crisis.

In an unprecedented case in October, the European Commission demanded Italy redraft its budget amidst fears that overspending by the already heavily-indebted country could potentially trigger an economic crisis in the Eurozone. Economy minister Giovanni Tria had been trying to smooth things over, appealing for co-operation with the EU and its financial regulation and a cap of 1.6% of GDP for the budget deficit. The coalition government, made up of the far-right anti-immigration Lega and ‘anti-establishment’ M5S, rejected his proposal and continued to rail against the European Union as the common enemy of Italians. The Lega’s hardline anti-immigrant interior minister Matteo Salvini was quoted on RAI radio saying the EU had ‘got it wrong if they are even just thinking of imposing fines on the Italian people’. Salvini’s anti-EU stance has gained support for the Lega. Although it was the junior partner when the coalition was formed, it has overtaken M5S in opinion polls: a recent Bloomberg survey gave it 31.7% support against M5S’s 27.4%.

Now the EU is faced with a dilemma: if it comes down hard on Italy and begins an ‘excessive deficit procedure’, which could include sanctions of up to 0.5% of Italy’s GDP and a cut of multibillion euro loans from the European Investment Bank, this could work in the favour of the coalition. It could boost its support in next May’s European Parliament elections, allowing it to continue to blame harsh treatment by the EU for the country’s economic troubles. Salvini and his Lega could use this to deepen alliances with other anti-immigrant right-wing states such as Hungary and Austria which have come into conflict with the EU over fiscal and immigration law. But the need to force Italy to comply with budget discipline is the greater pressure. The European Central Bank (ECB) has raised concerns about the market reaction to the Italian budget, warning that ‘stocks and bonds could suffer, destabilising its banks, and creating a risk of contagion to other eurozone economies’. This is a risk the EU will not take, and although Italy is predicting growth due to increased spending, these claims have been rebuffed as overly optimistic by the EU, IMF and ECB.

Both coalition parties rode to success in March 2018 on a wave of anti-EU, anti-corruption and anti-establishment rhetoric, and posed themselves as new and distinct from previous neoliberal administrations. It is therefore crucial for them to be seen to be following through with audacious campaign promises from Lega’s tax cuts for the middle-class self-employed and small business owners, and M5S’s higher pensions and ‘citizen’s income’ of €780 per month. M5S gained much of its 32% share of the vote in the southern region of Italy, on the basis of its promises to help the poorest sections of working-class Italians by increasing welfare and taxes on banks and large companies, reducing the pensions of the wealthy and slashing the military budget. But as part of the coalition M5S has agreed a 15% flat tax and promised to privatise more state assets to pay for the budget, alongside programmes of repressive immigration legislation. Despite the show of defiance there have been some amendments, including a promise to privatise more state assets should the budget breach 2.4% of GDP, and a sugar tax to fund tax cuts for the self-employed.

The showdown between Italy and the EU may lead to billions of euros of sanctions and deepening splits in the imperialist European bloc; it could lead to an economic crisis as severe as the Greek debt crisis in the aftermath of the 2007-8 financial crash. But until there is a class-conscious and organised mass movement of the working class against austerity, racism and poverty, and a rejection of the capitalist system that creates these crises, there can be no lasting progress in Italy.


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