Italian premier Matteo Renzi is central to the maneuvering for the European Commission presidency. Photo: Getty
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Don't overlook Italy's PM in the European Commission power struggle

The tussle for the European Commission top-spot isn't just Cameron vs Juncker's supporters; Matteo Renzi, the Italian prime minister, is a key broker.

The hubbub and soap opera of who gets the European Commission presidency may have centred on a power struggle between David Cameron and the supporters of Jean-Claude Juncker, but it would be a mistake to overlook the rise of another man – Italian prime minister Matteo Renzi.

Renzi has only been in post since April, but by tying his support for a Juncker presidency to whether the conservative spitzenkandidat will agree to loosen the EU’s budgetary rules, he has emerged as a key broker.

He also has a strong hand to play. Renzi’s Democratic party scored a decisive victory in May’s European election poll, taking 31 of Italy’s 73 MEP seats, and he has strong support among public opinion and his government.

The EU’s stability and growth pact requires governments to keep budget deficits below 3 percent and debt levels to 60 percent. But despite years of austerity most EU countries have barely managed the 3 percent deficit limit, while average debt ratios have soared to over 90 percent of GDP.

It is unclear whether Renzi will demand a re-write or merely a generous reinterpretation of how the rules are applied, but the direction of travel is clear.

And it is gaining support.

Earlier this week, German economy minister and social democrat party leader Sigmar Gabriel, called on the implementation of the deficit rules to be relaxed, commenting that “countries that are embarking on reforms must have more time to cut their deficits, but it has to be binding.”

“This is what we intend to put up for debate in the weeks and months ahead as part of a reorganization of European policy,” he added.

Gabriel was quickly slapped down by Angela Merkel, and his boss in the finance ministry Wolfgang Schaueble, who insisted that 3 percent limit offers enough flexibility.

Meanwhile, Herman van Rompuy’s office were forced to scotch rumours that the European Council president was preparing a joint paper with Renzi on the issue.

But for all that, there is also sympathy among some EU officials with the difficulties faced by Italy and other countries, who are forcing through unpopular labour market reforms but are strait-jacketed by the pact’s rules from targeted stimulus measures.

As a result, both countries are locked into vicious spirals. Despite keeping within the EU’s deficit rules, a two year recession has pushed Italy’s debt burden to an eye-watering 130 percent, second in size only to Greece. There is also an awareness that as the bloc’s second and third largest economies, France and Italy fall into the ‘too big to fail’ category of countries in the eurozone.

But it was inevitable that the issue would be returned to. In 2010 and 2011, when the eurozone debt crisis was at its bleakest, many politicians were prepared to commit themselves to anything that made them look tough on deficits and tough on the causes of deficits.

The main ideological battle that was waged on these reforms, and ultimately won by Europe’s right back in 2011 and 2012, was on whether to give preferential treatment to public investment targeted at education, research and infrastructure projects.

Critics say that this so-called ‘golden rule’, encourages creative accounting and that the 3 percent threshold gives governments sufficient flexibility.

In contrast, the Keynesian school of thought argues that the 3 percent deficit limit enshrines austerity that, in many cases, will cause an economic recession to be deeper than need be. In the short-term spending cuts may help balance the books, but without investment they won’t lead to recovery.

But it is not just centre-left politicians who are clamouring to re-write the rules, or at least reinterpret the way they are applied. Conservatives in much of southern Europe find that years of pushing through painful austerity programmes have done little to improve their economic prospects.

That Renzi is spearheading this campaign alone is also indicative of France’s decline. When Francois Hollande became only France’s second Socialist president to be elected since the Fifth republic began, it was expected that he would become a badly needed figurehead for the European left, and a counterbalance to Berlin.

It has not happened. Instead Hollande has lurched between domestic election defeats and ever declining personal ratings. Struggling to meet its budget targets despite being given a two year extension, France would be one of the main beneficiaries from a loosening of the EU’s fiscal rules. But its voice post-European elections has been silenced.

Renzi’s gambit may not secure an immediate policy change, but it highlights his status as the leading centre-left politician on the EU stage, and is an important mark in the sand ahead of Italy’s six month presidency. His timing could hardly be better.

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Leader: The unresolved Eurozone crisis

The continent that once aspired to be a rival superpower to the US is now a byword for decline, and ethnic nationalism and right-wing populism are thriving.

The eurozone crisis was never resolved. It was merely conveniently forgotten. The vote for Brexit, the terrible war in Syria and Donald Trump’s election as US president all distracted from the single currency’s woes. Yet its contradictions endure, a permanent threat to continental European stability and the future cohesion of the European Union.

The resignation of the Italian prime minister Matteo Renzi, following defeat in a constitutional referendum on 4 December, was the moment at which some believed that Europe would be overwhelmed. Among the champions of the No campaign were the anti-euro Five Star Movement (which has led in some recent opinion polls) and the separatist Lega Nord. Opponents of the EU, such as Nigel Farage, hailed the result as a rejection of the single currency.

An Italian exit, if not unthinkable, is far from inevitable, however. The No campaign comprised not only Eurosceptics but pro-Europeans such as the former prime minister Mario Monti and members of Mr Renzi’s liberal-centrist Democratic Party. Few voters treated the referendum as a judgement on the monetary union.

To achieve withdrawal from the euro, the populist Five Star Movement would need first to form a government (no easy task under Italy’s complex multiparty system), then amend the constitution to allow a public vote on Italy’s membership of the currency. Opinion polls continue to show a majority opposed to the return of the lira.

But Europe faces far more immediate dangers. Italy’s fragile banking system has been imperilled by the referendum result and the accompanying fall in investor confidence. In the absence of state aid, the Banca Monte dei Paschi di Siena, the world’s oldest bank, could soon face ruin. Italy’s national debt stands at 132 per cent of GDP, severely limiting its firepower, and its financial sector has amassed $360bn of bad loans. The risk is of a new financial crisis that spreads across the eurozone.

EU leaders’ record to date does not encourage optimism. Seven years after the Greek crisis began, the German government is continuing to advocate the failed path of austerity. On 4 December, Germany’s finance minister, Wolfgang Schäuble, declared that Greece must choose between unpopular “structural reforms” (a euphemism for austerity) or withdrawal from the euro. He insisted that debt relief “would not help” the immiserated country.

Yet the argument that austerity is unsustainable is now heard far beyond the Syriza government. The International Monetary Fund is among those that have demanded “unconditional” debt relief. Under the current bailout terms, Greece’s interest payments on its debt (roughly €330bn) will continually rise, consuming 60 per cent of its budget by 2060. The IMF has rightly proposed an extended repayment period and a fixed interest rate of 1.5 per cent. Faced with German intransigence, it is refusing to provide further funding.

Ever since the European Central Bank president, Mario Draghi, declared in 2012 that he was prepared to do “whatever it takes” to preserve the single currency, EU member states have relied on monetary policy to contain the crisis. This complacent approach could unravel. From the euro’s inception, economists have warned of the dangers of a monetary union that is unmatched by fiscal and political union. The UK, partly for these reasons, wisely rejected membership, but other states have been condemned to stagnation. As Felix Martin writes on page 15, “Italy today is worse off than it was not just in 2007, but in 1997. National output per head has stagnated for 20 years – an astonishing . . . statistic.”

Germany’s refusal to support demand (having benefited from a fixed exchange rate) undermined the principles of European solidarity and shared prosperity. German unemployment has fallen to 4.1 per cent, the lowest level since 1981, but joblessness is at 23.4 per cent in Greece, 19 per cent in Spain and 11.6 per cent in Italy. The youngest have suffered most. Youth unemployment is 46.5 per cent in Greece, 42.6 per cent in Spain and 36.4 per cent in Italy. No social model should tolerate such waste.

“If the euro fails, then Europe fails,” the German chancellor, Angela Merkel, has often asserted. Yet it does not follow that Europe will succeed if the euro survives. The continent that once aspired to be a rival superpower to the US is now a byword for decline, and ethnic nationalism and right-wing populism are thriving. In these circumstances, the surprise has been not voters’ intemperance, but their patience.

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump