Is Italy the new Greece?

Like its fellow eurozone member circa 2015, Italy is on the verge of a major crisis

Italy is on the verge of a major political and economic crisis. On March 4, an anti-establishment Italian coalition won power on promises to confront eurozone-imposed austerity, but now, that coalition is fracturing under pressure from eurozone defenders who wield key points of power. Italian stocks are falling. Markets are getting jittery. And the financial media is once again warning about possible "contagion" that could infect the global economy.

Which begs the question: Is Italy going to be the next Greece?

Not long ago, Greece was swept up in an eerily similar crisis that almost engulfed all of Europe — and unfortunately for the country across the Ionian Sea, the comparison does not bode well.

To understand the origins of the Italian crisis, you first have to understand that Italy, like Greece, never really recovered from the Great Recession. After the global financial crisis of 2008, Italy's unemployment rate leapt from 6 percent to 13 percent. Ten grinding years later, it's only down to 11 percent. For Italians under 25, unemployment is a vertigo-inducing 32 percent.

In this atmosphere of stagnation and desperation, it's not surprising that the March 4 election delivered a populist coalition. It's an oddball mix of the left-leaning Five Star Movement, headed by the 31-year-old Luigi Di Maio, and the right-wing anti-immigrant League, led by Matteo Salvini. Neither party won enough votes on their own to govern, but by forming a coalition they achieved a sizable majority in the parliament.

The new government's platform included several ambitious economic promises: First, a modest universal basic income of 780 euros (or $960 U.S.) a month. Second, the creation of a new flat tax. Third, repeal of controversial cuts to Italian pensions initially pushed through in 2011. And finally, canceling a previously planned increase in the country's value-added tax.

Unfortunately, it's not clear how the coalition could deliver on that platform without a big increase in the Italian government's deficit. That would run afoul of eurozone rules, which could result in the European Central Bank (ECB) refusing to buy Italian debt.

For a country like the U.S., which controls the currency it borrows in, a ballooning national debt isn't an insurmountable problem: The government can just continue printing money to finance its deficits as long as the economy remains below capacity and inflation remains low.

But in the eurozone, the ECB controls the euro. This effectively deprives Italy (and every other eurozone member) of sovereign authority over its own fiscal policy. If creditors — which usually means the eurozone financial authorities — aren't willing to lend it money, a eurozone country must cut spending until its budget balances.

This is basically what happened to Greece. Rather than allow the country to run the massive deficits needed to repair its economy, the eurozone forced Greece to massively slash its spending and safety net by threatening to cut it off from financial support if it didn't. That crushed Greece's economy, and far-left Syriza won power in 2015 on a promise to restore the country's public investment and social spending.

But eurozone officials weren't willing to play ball. That forced Syriza to accept one of two catastrophic choices: Either submit and destroy the Greek economy, or leave the eurozone — and also spark an economic crisis, at least in the short-term. Ultimately, Syriza submitted.

Italy's coalition government seemed headed for the same standoff. Like Syriza before them, the League and Five Star dealt with the no-good-choices problem by playing coy about what would happen when the eurozone inevitably refused their fiscal plans. Neither party explicitly campaigned on leaving the eurozone. But their platform certainly implied a make-or-break confrontation. And the coalition's plan to have the Italian treasury print a new form of government security — one that could eventually serve as an alternative currency — did nothing to assuage eurozone authorities.

Then, over the weekend, the oddities of Italy's government design intervened.

Italy has a parliamentary system, in which the executive power is wielded by the prime minister, who is elected by parliament. But Italy also has a president, elected separately. The president serves mainly as a figurehead, but does have some crucial veto powers. And over the weekend, Italian President Sergio Mattarella exercised those powers.

The coalitional government had nominated Paolo Savona, an 82-year-old economist with an illustrious record in public and private finance, to head Italy's economics ministry. But Savona was also a harsh critic of the eurozone's design and policy. He issued a statement over the weekend aimed at calming fears. It wasn't enough: Mattarella scuttled Savona's nomination, and after a brief attempt at compromise the coalition fell apart.

Another round of elections in the coming weeks will try to form a new government.

This was all technically within Savona's powers. But Yanis Varoufakis, the former Greek finance minister under Syriza, pointed out it was also an extraordinary intervention into the democratic process by nerve-wracked pro-eurozone elites. That Mattarella wants a former IMF technocrat to run an interim government certainly doesn't help. Di Maio is already calling for Mattarella's impeachment.

Worse, it's Salvini's League party that's most likely to gain further strength from another round of elections. That's also what happened in Greece: Rather than driving a move back to the pro-eurozone center, Syriza's defeats have empowered the country's hard-right factions. So even if another election is called, Italy will be right back in the same brewing confrontation it's headed for now, but with a much more Trump-esque government. In a seemingly panicked move to discipline Italy's eurozone skeptics, Mattarella may have simply insured that the crisis, when it eventually comes, will be even worse.

"In short, he fell right into Mr. Salvini's trap," Varoufakis bluntly put it.


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