Italy and the Euro's Uncertain Future

Gordon Brown, most notable for his bungling of the 2008 financial crisis during his brief tenure as British Prime Minister, will forever be defined by his economic missteps rather than any of the more beneficial policies he pursued as Tony Blair’s Chancellor of the Exchequer from 1997 to 2007. However, it is hard to dispute that his repeated refusal to support Britain joining the Eurozone has left Britain in far better shape than it would have been otherwise. The United Kingdom’s ability to control its own money supply has granted it a degree of freedom most other European countries could only dream of. And although Brexit negotiations have proved challenging for the Britain-in large part due to the acrimoniously vindictive nature of the EU-it is likely that, if the Pound Sterling had been fazed out by the Euro a little over a decade, the negotiations would be incalculably more difficult due to the UK needing to reinstate its own mechanisms for printing money upon its exit from the Union.

Britain’s reluctance to join in on EU projects such as the Euro reflects both a general desire to remain a degree of autonomy from the continent, as well as a general distrust of the European project, the result of decades of anti-EU rhetoric on the part of political figures left and right of center (although he professed his opposition to Brexit prior to vote in 2016, Labour leader Jeremy Corbyn has a long history of criticizing it) as well as past crises caused by greater integration with Europe. The Black Wednesday crisis, in which the economic strain of German reunification caused the price of the Deutschmark to fall, thus sending the Pound, to which it had been tied as part of the European Exchange Rate mechanism, into near-collapse. Black Wednesday, along with the subsequent difficulty it caused the British economy, virtually destroyed confidence in the Conservative government of John Major and culminated in his landslide defeat at the hands of Tony Blair and the Labour party in 1997.

Anyone looking for a prime example of the harmful effects of joining the Euro would be well-served by observing the case of Italy. In the sixteen years since they adapted the Euro, the Italians have been hard-hit by economic instability, high unemployment, and ballooning public debt-worth 132% percent of the Italian GDP at the time of this writing. In the wake of this decade-plus of chaos brought upon almost entirely by the weakness of the Eurozone as a political model, it is not surprising, then, that Italian voters abandoned the country’s pro-Europe mainstream parties in droves in this year’s general election, turning instead to the far-right League and the anti-establishment, populist Five Star Movement. It is looking increasingly likely that both parties will enter into a coalition with one another. Although both Matteo Salvini, leader of the League, and his Five Star Movement counterpart Luigi Di Maio endeavoured to turn down the level of anti-EU rhetoric emanating from their parties, their early policy proposals suggest a total reversal from the policies of the political centrists who have failed to govern Italy for the past four decades.

An early version of their coalition accord, leaked to the press this week, calls for the cancellation of €250 billion of Italian debt, a reduction in Italy’s annual contribution to the EU, the establishment of a Euro opt-out mechanism, and the renegotiation of treaties between Italy and Europe. Additional policy proposals such as the cancellation of Russian sanctions, as well as the introduction of a 15-20% flat tax and minimal basic income, have already set the EU into a frenzy. The League/FSM economic platform would cost between €65 billion and €100 billion, with both parties affirming that they will pursue their policies regardless of EU opposition.

The present situation in Italy is perhaps most reminiscent of the rise of the socialist Syriza party and its charismatic leader Alexis Tsipras in Greece, which similarly tried to take on the EU only to be forced to agree to accept an EU/IMF loan requiring massive cuts to the country’s pension and welfare system, already gutted by years of economic upheaval. Greece’s high unemployment rate, at a similar level to Italy’s, meant that the imposition of fresh cuts were not offset as they might have been in a stronger economy. While Italy’s economic situation is certainly not as dire as it is in Greece, if the League/FSM platform plunges the country into crisis as their new programs can not be sustained without a capacity for issuing currency or merely fail to lead to economic improvement, Italy could very well drop the Euro or consider leaving the EU itself, both of which Greece came close to doing in 2015. Despite the hardships it has endured, Italy is still the third-largest economy in the Eurozone, meaning that an exit from the currency would call the very future of it into question. If the League and FSM decide to enact all of their proposals, aggressively spending and racking up huge deficits, there is a real chance that global markets’ faith in Italy’s ability to repay its debt will collapse, dragging the Italian economy into crisis. The EU was able to coerce Greece to retain the Euro, and was able to offset the effects of the Greek crisis thanks to strong economic numbers in Germany and elsewhere in the Eurozone. With Italy, it may not be so lucky.

From the outset, the Euro model was a flawed one, built upon the notion of various countries, at various stages of economic development, joined in a single currency union kept afloat by its larger members. While the Euro would likely survive an Italian exit, such an event could ultimately trigger a larger wave of defections from its smaller members, until eventually only Germany, France and a handful of others remain. For Italy to wield such power is remarkable; for the first time in the Eurozone’s history, its future lies outside of Berlin, Paris, or Brussels, and is instead placed in the hands of a group of inexperienced but ambitious populists who may be willing to instigate its potential collapse.

Kuk James is a member of the Class of 2021 at Dartmouth College.