Thu, Oct 11, 2018 - Page 9 News List

Italy’s new populism
is not new at all

Increasing spending is the only way the ruling coalition can deliver on its grand campaign promises, leaving the nation in an even worse fiscal position

By Paola Subacchi

As it stands, Italy lags behind other large European economies in terms of output, employment and income growth, with wages failing to keep up even with its abysmally low productivity gains.

Rather than offering Band-Aids, the ruling coalition should be working to boost Italy’s competitiveness, which has been undermined since the crisis by the weak recovery of real exports and low investment, which, at under 9 percent of GDP, remains significantly below the eurozone average.

Even the League’s own voters are unlikely to buy into the citizen’s income program, owing to the perception that it would feed a culture of dependency and entitlement that many of them oppose. Indeed, the coalition’s fissures are beginning to show.

For now, the League and M5S remain united by their determination to defend Italy’s sovereignty against EU efforts to undermine it. After spending weeks arguing with EU leaders about migration, the government is now challenging the Maastricht Treaty’s rules, all in an effort to maintain popular support.

However, here, again, short-term political interests are at odds with long-term economic imperatives.

In a world where capital flows across borders instantly, rigid notions of sovereignty are not only inappropriate, but also dangerous, not least because they stoke fears among international investors.

As Argentina’s experience starkly demonstrates, international investors’ mistrust of populist governments can result in upheaval: As they withdraw their funds, a sovereign-debt crisis becomes a self-fulfilling prophecy.

Italy is not there yet, but since the end of May, yields on its 10-year sovereign bonds have increased by about 210 basis points, bringing the differential with the German bund to more than 270 basis points.

Moreover, all the ingredients for a crisis are there: a weak growth outlook, a poor and deteriorating fiscal position, a vulnerable banking sector with substantial sovereign-debt exposure, and no credible plan for needed structural reform.

If those in Italy’s government who advocate a departure from the eurozone get their way, the situation will become even more explosive, owing to widespread economic destabilization and the destruction of confidence.

After all, membership in the EU and the eurozone has been the main force pushing Italy away from irresponsible short-termism and toward greater fiscal discipline.

Historically, Italians trusted the EU more than their own governments, but that might no longer be true, meaning that the risks of a harder push toward the exit are mounting.

However, even if Italy remains in the eurozone, the ruling coalition is likely to behave much like its predecessors. The only novelty may be the extent of the damage it causes.

Paola Subacchi is a senior fellow at Chatham House.

Copyright: Project Syndicate

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