The EU-Italy Showdown is Not About Fiscal Deficit, it’s About ‘Trust Deficit’
Italy has an interesting government at the helm, a left-wing right-wing coalition that owes its election to decades of economic disillusionment. A government that plans to help the rich by cutting taxes, while promising a basic income for the poor. A government that’s most adrift from EU, and possibly the one that will follow in Britain’s footsteps to take the exit lane. While it may be a case of thinking too far too soon, currently, things are not looking good as EU and Italy play chicken over the latter’s budget deficit.
Unprecedented, but not Unsurprising
The rejection of Italy’s draft budget is unprecedented. At the heart of the feud is Italy’s ambition of undoing the alleged wrongs by EU. After coming to power, the government’s first budget has ‘populism’ written all over it. From guaranteed minimum income to a number of tax cuts, Italy’s coalition government is keen on proving that its election pledges were not mere rhetoric. However, these measures will widen the gap between spending and tax revenues to 2.4% of GDP in 2019. The upper limit, according to EU rules, is 3%, and while Italy is well below that, it is the country’s colossal debt load that’s a source of contention between the two warring groups.
Reducing Italy’s debt load – a colossal 132% of GDP – will entail further austerity measures and spending cuts. However, the coalition government in Italy is not ready to do that as it believes these measures are partly responsible for the existing economic quagmire. The election of the far-right and far-left parties earlier this year had already set the stage for showdown with the EU—the rejection of a populist budget may just be a taste of things to come.
Growing Euroskepticism Poses Tough Questions to EU’s Future
Many will argue that many countries have, in the past, increased their fiscal deficit, while risking long-term bearishness. However, most of these EU countries have never been viewed in the context of separatism. The reason why a disagreement on Italy’s fiscal policy has gained mainstream media is because at its heart, it is essentially about the country’s disillusionment with EU.
Britain’s exit from the European Union can set a precedent that can see more countries leaving to take important decisions by themselves. There is a growing emotion of euroskepticism that is palpable among policy makers, markets, and those at the helm of affairs. The very idea of European Union as an economic bloc is being questioned, although Italy’s government is currently denying any plans of seceding.
For Italy, the Budget Fight is Just What the Doctored Ordered
One may be tempted to believe that Italy’s government would have been relieved if EU would have accepted the draft budget. However, a rejection and an order for revision is what the populist government hoped for. After years of rhetoric, it has provided the Five Star and the League a vindicated “we told you so”, that they can use to further strengthen their vote base.
EU Risks Becoming another UN
As far as the EU is concerned, many will argue that that the budget rejection is suicidal. The EU may have the best interests for the bloc in mind, but currently it’s facing a challenge to its very existence. With elections for a new European Parliament due in May, and a wave of euroskepticism sweeping the continent, it risks becoming another UN – an organization that’s more symbolic than effective.
Rationally, EU may have some very valid grounds for turning down the budget, but it may inadvertently undermined the simmering sentiment that sees it as an authoritarian, technocratic, and spent force. As Pakistani novelist Mohammed Hanif writes in his new book, Red Birds, “We should speak up and speak louder for those who have been silenced. We should also be wise and occasionally shut up so that we can live to speak up another day,” -- EU should have been wise to know that may be, it was a battle for another day.
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