Riccardo Alcaro, Research coordinator and head of the Global Actors Programme at the Istituto Affari Internaztionali
To an extent, yes, but some elaboration is needed here. Is there a chance that a Euroskeptic government will eventually bring about Italy’s exit from the eurozone, either by choice or by pushing forward a fiscally unsustainable policy agenda? In theory, yes. In practice, I doubt it.
Italy has never been so filled with resentment toward the EU and the euro as it is today, but that does not automatically translate into support for such a massively risky move as leaving the eurozone.
So, what to expect? Italy is heading toward snap elections. If polls can be trusted, the most likely scenario is a right-wing coalition led by League party leader Matteo Salvini and supported by Berlusconi’s Forza Italia and another small right-wing party. This government would bark but not bite on issues related to the eurozone. What Salvini would do is to follow the example of Hungarian Prime Minister Viktor Orbán and use the EU as a scapegoat to justify his failure to deliver on major promises on tax cuts and migration checks and as a punching bag to maintain popular support. Most worrisome for the EU, though, is that Salvini would make any plan to reform Europe much harder to achieve.
Rosa Balfour, Senior fellow, Europe Program at the German Marshall Fund of the United States
No, Italy is not Europe’s Achilles heel, and the continued use of such platitudes obscures understanding the desperate situation Europe’s economic and political governance is in from the point of view of democratic legitimacy. We pro-Europeans may not like the messengers (angry, illiberal populists) or the message (euro exit or policies that would make Italy bankrupt and thus imperil the euro), but the basic point is that there is massive, deep, and popular anger over the austerity policy that the dominant view on eurozone governance has chosen.
The obtuse failure to address how Europe’s economy is managed in a less ideological way and with an open mind to alternative proposals is rupturing the union. And there are scores of well-respected economists with critical and constructive views about the eurozone, not just angry populists. Persevering in not listening to this basic message is becoming diabolical. This latest reiteration in Italy of a profound and longstanding European crisis seems to be reaching a point of no return, with little enlightenment about how discontent is transforming into popular vengeance.
Noah Barkin, Special correspondent for Europe at Reuters
Italy is the country where all of Europe’s ills seem to converge. Its economy has been stagnant for more than two decades. Only three countries in the world have a higher public debt-to-GDP ratio. And its banks are plagued by bad loans. Italy has also been on the frontline of Europe’s migration crisis. Because of this perfect storm, its citizens have turned to the political fringes for solutions. Europe has seen this volatile mix before—in Greece. But there are crucial differences between the two countries that make Italy a far bigger risk for Europe.
The first is the sheer size of its economy. At about $2 trillion, it is ten times as big as that of Greece. Bailing out Italy is not a realistic option for the EU. A second difference is public support for the EU. Back in July 2015, when Greece held what was then widely seen as a referendum on its membership in the EU and euro, polls showed that a solid majority of the country supported staying in the bloc and its single currency. The latest Eurobarometer survey shows that only 39 percent of Italians view EU membership as a good thing. So regardless of how the Italian political circus plays out in the months ahead, one thing seems clear: Europe has not experienced the convergence of risks in a single member state that it now faces in Italy.
Federiga Bindi, Senior fellow at the School of Advanced International Studies at Johns Hopkins University, Jean Monnet chair at the University of Rome Tor Vergata, and D. German distinguished visiting chair at Appalachian State University
No, it is not. Undoubtedly, President Sergio Mattarella—by pushing the Five Star Movement and the League together, only to refuse them the go-ahead with their government—opened an unprecedented political and institutional crisis that has bitterly divided Italians. Still, where there is debate, there is democracy.
The risk, however, is transforming the next election into a referendum on Europe, something nobody really wants: not the president and not even the League or the Five Star Movement. The League has been successfully governing the richest parts of Italy for decades—areas with the highest concentration of SMEs, which have an interest in staying into both the EU and the euro.
Net of the propaganda, the question is not about the euro, but rather about a feeling of being abandoned at the periphery of Europe. The people who once brought civilization across the continent, are—in addition to being out of the football World Cup!—now left alone to deal with the migration crisis (largely a result of France and the UK’s war in Libya), while Germany holds tight to its economic surplus and is unwilling to consider any kind of expansionistic policy that would help Italy recover economically. Will the fear of an Italexit make Berlin change its stance and create a more balanced EU?
Uri Dadush, Nonresident scholar at Bruegel
Italy is a big economy, and its external liabilities—private and public together—are about $3 trillion, 75 percent of which are in the form of debt. Not only do its troubled banks hold more nonperforming loans than any other eurozone nation, they also own a large chunk of the government’s potentially unsustainable debt. Thus, Italy has the potential of becoming the largest default in history by a large margin. The per capita GDP of Italians has declined by nearly 10 percent since the euro was introduced in 2000 (even Greece did better) and it is not surprising that its politics has polarized to the left and right.
Democratically elected, a coalition of populists now wants to slash taxes and increase social spending at the same time. There is no doubt that the euro setup—most importantly the inability to devalue—has, combined with Italy’s structural weaknesses, caused a loss of competitiveness. The result has been deindustrialization, chronic unemployment, and emigration of the best and brightest. Yet there is no way out of the euro without triggering an even more disastrous crisis that will leave Italians much poorer than today. I believe the populists know that if they cause a euro exit to happen by acting on their irresponsible fiscal plans, they will be committing political suicide. That is what the markets are signaling. The best course, which is also the morally correct one, is to let them govern. As important is to listen to their demands for eurozone reforms, which are long overdue anyway.
Marta Dassù, Senior director of European Affairs at the Aspen Institute
Yes, Italy is Europe’s Achilles Heel—and not the only one. It is the only founding member of the EU where the largest party (the Five Star Movement) is a populist movement and where a governing coalition may, in the end, emerge from the current deadlock with the sovereigntist and Euroskeptic League in the lead. In the eyes of the League’s leader, Matteo Salvini, Italy’s true allies in Europe are Marine Le Pen and Viktor Orbán. The adversary is Angela Merkel. The battleground is the economy, even more than migration. According to the populist / nationalist camp, Italy must free itself from European fiscal constraints so as to escape a prolonged stagnation. The problem is that such an “unchained Italy,” the third largest EU economy with the third highest debt in the world, would be immediately and massively hit by the markets. And Italian turmoil will further reduce the willingness of Germany to share risks in the eurozone.
A dramatic divide has emerged—in Italian politics and society—on the country’s relationship to Europe. The traditional pro-EU consensus is shattered: the truly pro-integration elites (including business and a badly weakened Democratic Party) are squeezed by “the people vs. the establishment” clash. They will suffer more defeats if Germany, isolating Macron, rejects needed reforms of the eurozone. The Italian case confirms that defending the status quo is no longer sufficient to save the EU from itself.
Silvia Merler, Affiliate fellow at Bruegel
Yes, Italy is the Achilles heel of Europe, for three reasons.
First, it is the only country where populist forces that are (or have been) openly Euroskeptic command more than 50 percent of the votes. This, combined with the recent institutional crisis, is likely to put Italy’s euro membership front and center in the next electoral campaign, further politicizing the already sensitive topic of Italy’s role in Europe.
Second, as a result of the current political turmoil, the country is under intense market pressure. The scenario of an Italian debt crisis would be horrific because none of the eurozone’s stabilization instruments could realistically be deployed to rescue Italy. The ECB could limit contagion, and the euro might even survive Italexit. But an exit would put Italy, the eurozone, and the European Union in deep distress, both economically and politically.
Third, what is happening in Italy fundamentally challenges the premises on which the ongoing debate about eurozone reform seems to rest. It makes clear that the ideological gap that needs bridging in order to achieve a resilient and democratically embedded monetary union is larger than the one separating France and Germany. Whether the Italian crisis will pull Europe together or farther apart is difficult to predict.
Miguel Otero-Iglesias, Senior analyst in International Political Economy at the Elcano Royal Institute
No. Italy is unlikely to leave the eurozone. The most likely scenario is that Italy will go through the same journey as Greece. Many Italians are angry and feel disempowered and this is why they vote for radical parties. But the majority of them do not want to leave the euro. If their elites are not able to produce stable governments (and they haven’t done so since the Second World War), how can they issue a stable currency?
Interestingly, Italians no longer direct their anger at Rome; they now blame Brussels for not delivering good governance and public goods, and for not solving their daily problems (including inequality, youth unemployment, immigration, and corruption). However, the majority of Italians also think that in the Germany has too much power in the EU, which has fueled a dangerous anti-German sentiment.
This is due to the fact that throughout the euro crisis, decisionmaking in the eurozone has been based on an intergovernmental logic. This was apparent in 2012 and 2015 with the Grexit talks. As long as this is the case, the “German problem” will not go away—and this remains the Achilles heel of Europe.
Yannos Papantoniou, President of the Centre for Progressive Policy Research
Following the election of the populist Syriza party, Greece managed to create a major crisis that failed to erupt because of the pressure of the financial markets and the government’s U-turn.
Ten-times-larger Italy is bound to provoke an earthquake if it pursues the populist challenge. If Carlo Cottarelli’s caretaker government fails to pass parliament’s vote of confidence, new elections would probably produce a larger populist majority. A Five Star-League coalition would challenge fiscal rules. When borrowing costs rise to levels that would render Italy’s public debt unsustainable, the country would need to be bailed out. Neither the eurozone nor the IMF would have the capacity to do that. Only the ECB could intervene by buying Italian debt, provided that (a) the populist government backs down, and (b) the U-turn is performed before credit ratings worsen to an extent that prohibits ECB interventions.
This looks like the more likely scenario. Its outcome depends on timing; that is, how soon a deal, coupling concessions to the populist government with acceptance of the rules, is reached. The alternative is Armageddon. Intensive diplomacy will be required in order to avert it.
Gianni Riotta, Member of the Council on Foreign Relations
How many heels can Europe sport? Greece, the United Kingdom, Poland, Hungary—too many, I’d say. Italy is in turmoil now. Two populist parties, the Five Star Movement and the League, enemies at the polls but political friends, are trying, in vain, to stitch together a cabinet and have dumped the country in a quagmire. Unflappable President Sergio Mattarella did not blink, as I predicted in La Stampa. Both the League leader Matteo Salvini and the Five Star’s Luigi Di Maio grossly underestimated the will of the low key, Sicilian-born president.
Elections may be scheduled for the fall. The markets will rumble. Italy’s debt is at 132 percent of GDP. Productivity has been stagnant for 20 years. Brain drain is a deep-set problem. Yet in the so-called “contract” that Salvini and Di Maio concocted for their hapless candidate premier Giuseppe Conte, there is barely a word on Industry 4.0, the digital economy, or innovation. Europe should help Italy, eventually, on immigration, and cut the country some slack on the economic front to empty the wind out of the populist wings. Almost racist rants like this Spiegel column on the Italian “beggars and scroungers” will only inflame the country’s rabid anti-euro sentiments and must be curbed by Merkel and Macron.
Stephen Szabo, Resident senior fellow at the American Institute for Contemporary German Studies
While Greece has gotten most of the attention, Italy has always been the Achilles heel for the eurozone and the European project. With its large deficits, stagnant economy, and fragile banking and political systems, Italy was a crisis waiting to happen. Now is that time.
The decision of President Sergio Matterella to reject the coalition government proposed by the Five Star Movement and the League will transform a political stalemate into a constitutional crisis. This ill-advised action will only strengthen the populist argument that Europe stands for technocratic neoliberalism and will further distance Italians from the EU. Whatever one thinks of the policies they propose, votes should matter more that interest rate spreads.
Italians have always been ambivalent about the euro but have regarded Europe as a necessary stabilizer to their own political system. Now, anti-European feelings will only grow and new elections are most likely to strengthen the populists. Matterella has created a self-fulfilling prophecy. Macron’s reforms have already been weakened by the lack of strong German support and will be under even greater threat both from a new Italian government as well as the latest instability in Spain.
Pierre Vimont, Senior fellow at Carnegie Europe
Italy has become one of Europe’s weak points, but it is not a fatal one. There are still strong assets in this founding member of the union with a solid pro-European base, according to opinion polls; a budget deficit that is half the size of France’s; a public debt far from being out of control; and a steady and improving reform of its banking system.
The concern with Italy lies ahead, against the political backdrop of a new round of elections now expected to take place in the autumn. By equating in very simple terms the pro-European stance to austerity and more sacrifices, President Mattarella has offered the populist coalition a field day for their electoral campaign and pitched the next vote as a referendum for or against Europe. This inescapable fallout of Italy’s current turmoil now brings a special responsibility to bear on EU leaders at their next European Council meeting in less than a month. If they cannot deliver a more positive message about Europe through concrete action on migration policy and support for the current efforts in Italy on banking reform and public finances—thus showing a genuine empathy for the difficulties of the Italian population—the anti-EU spiral will gain speed and open the way to a deep political crisis.
By emphasizing that they care and do take into account the concerns of the average citizen, EU leaders would demonstrate a solidarity that has been missing for too long in European matters. Furthermore, beyond the Italian case, they would give a concrete touch to the idea that Europe indeed can protect.