As Italy once again picks fights with the EU and the financial markets, the message from Brussels is clear: You might win the battle, but you wont win the war.
Italy is increasingly becoming EU troublemaker-in-chief by pushing for a national budget that would substantially raise the deficit and by playing hardball on migration — and the feeling in Brussels is that the Italians have underestimated how tough the EU can be.
Valdis Dombrovskis, a European Commission vice president, told reporters Tuesday that Italy is the EU country that has benefited most “from flexibility.” That point was echoed by the European Court of Auditors, which warned that the European Commission has applied its fiscal rules with excessive flexibility, making them ineffective in reducing debt in countries such as Italy where debt is very high.
The reason, according to EU officials, is that being flexible has been the right thing to do: because Italy is a founding member of the EU; because its €2.2 trillion public debt makes it a ticking time bomb in the single currency; because its sluggish economy needs help; and because, without an effective solidarity mechanism in place, Italy was all alone in dealing with migrants.
Matteo Salvini, leader of the nationalist League and Italys most powerful politician, wrote in his 2016 autobiography that when he was an MEP he was “scared by the ignorance” of lawmakers and journalists about how the EU works.
European Commissioner Valdis Dombrovskis | Brendan Smialowski/AFP via Getty Images
But he could have miscalculated the risk.
“After the extreme difficulty tackling the Greek crisis, we have to do everything to avoid a new Greek, or rather an Italian, crisis this time,” Commission President Jean-Claude Juncker said Monday at an event in Germany. “One crisis was enough and we have to prevent Italy from being able to get special treatment here that, if everybody were to get it, would mean the end of the euro. In this respect, Italy has to be treated strictly and fairly.”
Salvinis response was defiant. “I speak to sober people,” he said on Italian television.
As Italy takes a tougher approach, the reaction is getting tougher too.
The EU fiscal hawks are also getting more organized and united.
Since the new government took office in June, Italy has alienated even its closest ally, Malta, by accusing it of not being helpful in dealing with migrants. Its also annoyed many other EU countries on migration: Italys refusal to open up its ports to rescue boats in the Mediterranean has forced EU leaders to find case-by-case solutions to migration problems — an approach described by diplomats as “blackmailing,” “hijacking” and “not something constructive.”
There have already been consequences. In August, when Italy had a problem with a boat used by its coast guard that rescued migrants, the only EU country to offer help was Ireland. When Malta had a similar problem, there was no shortage of offers of assistance.
The latest example of Italian defiance came last Thursday when Rome backed a budget proposal that seeks to increase spending and cut taxes, but could raise Italys debt and would breach EU budget rules.
“We understand that one has domestic issues … but if you keep on [causing trouble] then the others start going around you,” said an EU diplomat. “In the longer term, Italy could find itself out of the benefits of the single market, or out of [the passport-free] Schengen area. Its difficult to see how a country can isolate itself and decide to lose influence and power.”
Thats likely to lead to a fine from the Commission. However, its not only the EU that could really hurt Italy, but the financial markets.
Ratings agencies will soon have to give their opinion on Italys economy, and will very likely downgrade the country, as the difference in borrowing costs between Germany and Italy continues to rise — on Tuesday morning it was at over 300 basis points, more than double the figure from a few months ago.
The EU fiscal hawks are also getting more organized and united. On Monday night the finance ministers of the Netherlands, Denmark, Finland and Baltic countries — some of the most vocal critics of big-spending Southern European nations — met for dinner and discussed the Italian situation, according to two EU officials.
“Salvini supporters need to sell their products on the other side of the Alps,” stressed one EU diplomat.
Bjarke Smith-Meyer contributed reporting.