Italy’s ticking crisis time-bomb

The unprecedented budget showdown between the Italian government and the European Union, which risked provoking a serious eurozone crisis, has ended with a compromise. However, all of the economic and political problems underlying this latest confrontation still remain. The serious crisis has simply been postponed to a later date.

The populist Lega/Five Star Movement (M5S) government came to power in June 2018, following protracted negotiations after elections in March, on the back of a vote representing a massive rejection of the main parties that had formed all the previous governments for over two decades. To mark a break with the past it offered clean government and an end to austerity, in particular the introduction of a minimum income and abolition of the Fornero pension act. For workers, the unemployed and layers of the impoverished middle class, whose living standards are lower than they were 20 years ago, the promise of a minimum income guarantee had a huge echo, particularly in the south of the country where the M5S gained most of its votes.

All of those electoral promises have since been watered down. The minimum income has effectively become a conditional unemployment benefit with the neoliberal aim of forcing people into slave-labour jobs. The pension act will not be abolished but will undergo a very small modification. Yet even introducing these minimal reforms, which will be welcomed by many sections of the population even in their limited form, meant presenting a draft budget to the European Commission with an estimated deficit of 2.4% of GDP.

This was within the EU’s 3% limit but was based on exaggerated growth estimates that nobody believed, and was three times higher than the deficit agreed with the previous government. Conflict with the EU was inevitable but the government vowed to stand firm. “For once”, declared Luigi Di Maio, leader of the M5S in full populist mode, “we are giving to the poor and not to the banks”.

The European Commission rejected the draft budget because of its implications for Italy’s public debt which, at €2.3 trillion, represents a time-bomb waiting to explode, with the real risk of blowing up the eurozone economy and the single currency itself. So the commission sent the draft back demanding changes which the coalition initially refused to make – the first time a national government has stood up to the EU in this way. This triggered an excessive deficit procedure which could have resulted in the Italian government being fined up to €9 billion.

This conflict gave a useful propaganda weapon to the coalition, particularly to the far-right Lega which has used anti-immigrant and anti-EU rhetoric to gain and extend its social base. Lega leader, Matteo Salvini, declared the EU’s stance to be an attack not against a government but “against a people, democracy and sovereignty”. According to opinion polls, anti-EU sentiment in Italy is higher than in the UK – 39% think the EU is a good thing compared to 47% in the country that voted for Brexit – although only 26% would support leaving the euro at this stage.

Salvini has exploited this rapidly growing feeling, not only over the budget but especially regarding immigration and the boats crossing the Mediterranean from Libya. As a consequence, the Lega’s support has increased from 17% in last year’s election to over 30% now. It has overtaken the M5S which has seen its support fall from 32% to around 26%. Only 67% of those who voted for the M5S in 2018 say they would do so now. This figure falls to 58% among young people.

Budget conflict

In the end, both sides in the budget conflict blinked and an agreement was finally reached to reduce the deficit by a further 0.4%. If the EU had insisted on continuing with the excessive deficit procedure, and ended up by fining the Italian government, that would only have reinforced right-wing populist propaganda. This rails against ‘the diktats of the European elite, the bankers and the speculators’ who are ‘conspiring to prevent democratically elected governments from carrying out the electoral promises the people voted for’. It would have given a powerful boost to right-wing populists in the European elections in May, not just in Italy but throughout Europe.

It was, as EU finance commissioner Pierre Moscovici and other EU officials had hoped, the ‘discipline’ of the market that forced the government to back down. Interest rates on Italian debt were shooting up rapidly on fears the economy could fall into yet another recession and a possible banking crisis, which would have had repercussions for the whole of Europe. Pressure was brought to bear to end the confrontation from sections of the Italian capitalist class, including from the small- and medium-size businesses in the north where the Lega draws most of its support. Nevertheless, the compromise has allowed the coalition to claim that making a stand against the EU has worked and that, despite the agreed deficit, the government will still be able to deliver its flagship policies.

In reality, the deficit climb-down means €7.5 billion less in public spending. What is more, if the budget agreement for 2020 is not met – a very likely scenario given the weakness of the Italian economy, which is expected to grow by 1% this year at best – an automatic rise in VAT on consumption will kick in. This increase had been agreed by the previous Democratic Party (PD) government but was, initially, cancelled by this one. In addition, a further €2 billion in cuts are to be implemented.

However, the timescale and the lack of any political alternative mean that Salvini will probably be able to achieve his aim of using the budget conflict and his hard line on immigration as a springboard for winning a big vote in the European elections. Initial polls carried out after the budget agreement are mixed. One shows support for both parties increasing slightly, another shows a slight decline.

It is also quite possible that Salvini will take advantage of a Euro-election win to provoke a general election in a bid to ditch the more ‘social minded’ M5S. This would please his small business base. However, a breakdown in the coalition before May cannot be ruled out. Di Maio has generally gone along with Salvini’s attacks on immigration and the EU. However, differences have emerged within the ranks of the M5S over this, the budget and other issues, such as reneging on promises to scrap big projects which damage the environment. These differences are beginning to be reflected in parliament.

The tragedy is that, as yet, no political alternative on the left has been built capable of channelling the disaffection which is currently in its early stages but will inevitably grow under the impact of economic and political crisis. The Italian economic bomb has not been defused; it has merely had its timer slightly adjusted. With Italian growth averaging just 0.4% over the past 20 years, the public debt is unsustainable and the day of reckoning cannot be deferred indefinitely.
This small conflict has shown that the EU institutions can be compelled to make some concessions. Crucially, it has also underlined that implementing meaningful and lasting reforms for the benefit of working people can only be achieved through mass mobilisation around a programme that starts from a refusal to pay the debt, but which challenges the whole economic and political basis of the EU bosses’ club and the capitalist market.


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