Opinion

Europe needs a strong Italy

Europe needs to have its Italian voice. A stable government is required not only to pursue domestic policies and remain fiscally prudent but also to negotiate on euro-area reform, priorities in the EU budget and intensifying competition in global trade.

By: Date: March 20, 2018 Topic: European Macroeconomics & Governance

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All eyes turn to Italy, in the wake of the country’s recent elections; neither Italy nor Europe can afford for it to take as long as in Germany to form a new government.

There are obviously domestic reasons why Italy needs a stable government. The elections reveal a country that is not only disenchanted with the political establishment – not an isolated case, in today’s Europe – but also internally divided. The new government needs to focus its energy on strengthening the growth potential of the country. For example, the inefficiency of a lengthy judicial system suffocates the country’s entrepreneurial spirits, but its reform requires political determination and a stable government.

Other reforms are necessary to boost Italy’s long-term growth trajectory, which has been disappointing for the last 20 years. Without that, it is hard to see how the crippling problem of youth unemployment can be overcome in a sustainable way. Fiscal policy can marginally support investments, but the level of public debt calls for prudent management of public finance if the overall strength and credibility of Italy is to be preserved.

Equally important, though, is that the European Union needs its Italian voice. After Brexit, the EU is at a critical junction, in terms of its institutional evolution. Many key discussions are ongoing at this stage. A first set of questions centres on whether and how the institutional structure and the macroeconomic governance of the euro area should be reformed. How should banking union be completed? How should the European Stability Mechanism (ESM) be reformed? Should there be a more formalised process for debt restructuring? These are issues of utmost importance for Italy as well, in which a wrong decision could do severe damage.

Discussions on all three topics are in full swing. Despite claims to the contrary, Germany and France do not yet agree and are, in fact, quite far apart. But after the re-election of Chancellor Merkel, there is a chance that consensus-building may accelerate. It will be of great importance for Italy and for the euro area that the achieved compromises are not minimalistic and naïve in their implications for Italy.

For example, a recent exercise made by French and Germany economists in building a consensus would put far too much emphasis on debt restructuring and far too little emphasis on what can be done to strengthen the sources of growth and cohesion in Europe. Such a minimalist governance structure would make it difficult for Europe to prosper and may put its financial, economic and political stability at risk.

If there has ever been a time for Italy to express a strong position on and in Europe, this is it. But while eight Northern countries’ finance ministers have already formed a joint position paper on reform of the Economic and Monetary Union (EMU), Italy has not yet taken a public position.

There are also other important open files in the “day-to-day” negotiations. For example, the European Commission would like to come to an agreement by the end of the year on the next EU budget for the period 2021-27. How should EU budget priorities evolve? This will be one of the most important European political debates this year.

EU citizens will judge the EU on whether it manages to shift spending priorities towards the future or whether the usual inertia will prevail, resulting in a backward-looking budget that neglects joint priorities such as managing the external border control and the integration challenge arising from immigration.

Countries like Italy, but also Germany and Sweden, have been let down on this issue in the past. It is important for Europe to not only recognise that this is a truly European challenge, but to seriously increase the technical and financial means to tackle the challenge. This would hardly be possible without Italy taking an active and forceful part in these talks.

The EU also needs to have a serious strategic discussion on its position on the global stage. With Donald Trump’s tariffs on the one hand and the Chinese government’s increasing assertiveness on the other, the EU’s position and future looks increasingly at risk of being undermined by these two powers. It is at times like these that the benefits of belonging to a regional trading bloc such as the EU become more evident. We will need to leverage our size with determined action that protects the EU without being protectionist, and with the right European innovation strategy that will strengthen Europe’s key industries.

Unless Italy forms quickly a strong and reliable government that constructively engages with its European partners, the debate on all three issues will move on quickly. The country risks being left behind at a time when decisions are taken that could shape the future of European integration for years to come.

On all of these issues, positions will be quite different to start with. But the EU has always been an exercise of bringing the diverging interests of its partners around the table and finding compromises. While consensus may be easier to achieve ignoring the Italian perspective, neglecting it would have major negative consequences in the long term. In short, Europe cannot afford to miss its Italian voice.


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