Italy and the EU on a collision course over budget

Italy and the European Union have been on a collision course since Berlusconi was overthrown in a "coup" in 2011.

More recently the Italian government had to submit its 2019 budget for approval in Brussels, which the EU Commision, an unelected body, controversially rejected. It gave the Italian government two weeks to yield to EU demands, which would give Italy until November 13 to respond.  

Italy has been led by the right-wing League and anti-establishment 5-Star Movement since June 2018 with the parties commanding more than 69 percent of the vote share. 

Elected on a platform of rejecting EU-imposed economic austerity and increasing fears on immigration, Rome and Brussels have been increasingly at odds. 

The new coalition government in Rome has sought to flex its muscle and exercise its democratic mandate by standing up to Brussels putting both sides in an increasingly dangerous showdown. 

The third largest economy in the EU has seen its fortunes wane since it joined the Eurozone in 2000. Italy's Gross Domestic Product (GDP) is barely larger now than it was in 2000. 

The 2009 financial crisis has only compounded Italian economic woes.

What is the fight about? 

Italia's real GDP growth has averaged a paltry -0.13 percent since 2006 according to Eurostat, the EU's statistical agency. Whereas the EU as a whole has grown by 1.24 percent. 

Thomas Fazi, a writer based in Italy speaking to TRT World believes the current tussle between Italy and the EU is a "crucial turning point in the slow-motion collapse of the EU." 

"From an economic standpoint, it is patently absurd to force further austerity on a country that continues to be mired by mass unemployment such as Italy: in fact, if anything the budget is not expansionary enough," adds Fazi.

The Salvini government has made several modest budgetary proposals including running a budget deficit equal to 2.4 percent of GDP, which would be less than the 3 percent ceiling set by the Maastricht Treaty. 

It would also be lower than France's, which has broken EU budgetary rules every year since 2008 and only in 2017 was it able to fall below 3 percent and is currently on 2.7 percent. 

But the battle is far more than just about percentage points. 

Matteo Salvini, Italy's deputy prime minister, minister of the Interior and also the leader of Lega Nord, a right-wing nationalist party uses Facebook like Trump uses Twitter to get his message out.

On November 1 Salvini delivered a live Facebook address to his followers in which he announced that Italy would no longer bow to EU dictates, "Nothing and nobody, no big or small letter will make us backtrack. Italy will no longer be a slave and will no longer kneel down."  

Salvini's coalition partner, Luigi Di Maio and head of the 5-Star Movement was equally strident saying in a recent interview, “We are not turning back from that 2.4 per cent target, that has to be clear ... We will not backtrack by a millimetre.”

Right-wing allies

The financial crises of 2008 had a deep impact on the EU and its member nations. 

It exposed the deep flaws within the monetary union. Countries that had adopted the Euro found their ability to manoeuvre limited by economic rules that restricted their ability to respond to unique economic challenges.  

The weakening economic environment and the banking bailouts necessary to keep the financial system afloat increased inequality which in turn caused deep disaffection within society.

In addition to all of this, the Arab Spring, which unleashed forces long suppressed, could not have come at a worst time for the EU. The resulting millions of migrants flowing into a politically divided EU only compounded political and economic problems. 

The decision by the German Chancellor Angela Merkel taken unilaterally in 2015 to open the doors to more than one million refugees from Syria and beyond created a rupture in EU relations which it has yet to recover from. 

What if Italy refuses to bow to EU demands? 

The Italian coalition government won an election earlier this year on a platform of lower regulations, universal basic income, lowering the retirement age, deporting or halting migration from African countries and a flat tax. 

In addition to this, both parties have a sceptical and critical approach to the EU. 

Salvini has not ruled out taking Italy out of the EU if it does not free Italy from some of its restrictive fiscal rules. 

Whereas the 5-Star Movement until recently advocated for a referendum on Italy's continuing use of the euro, a position that has now been proposed as a last resort. 

The EU machinery is however in no mood to compromise, fearing that any leeway for Italy might result in other economically fragile EU economies seeking relief from the rules.

The EU has threatened sanctions on Italy. It could ask the government to transfer the equivalent of 0.2 percent of its GDP to a European Union rescue fund. 

The EU could ask Italy to reduce its debt burden, which if it failed to do could result in an additional 0.2 percent GDP fine, suspending billions of EU funds marked for Italy and sending observers into Italian ministries to monitor state day to day operations as it did with Greece. 

If Italy continued to fail to cooperate, it could see fines rising to 0.5 percent of GDP, loans being withheld by the European Investment Bank and monitoring Italy's ability to issue new debt. 

The measures that the EU could take against Italy could financially cripple Italy and is also an indication of the grip that Brussels exerts on member states. 

Triggering this nuclear option set of measures, however, could lead to the fragmentation of the EU, as nationalist leaders seek to prove that they still have sovereignty of the nation over supranational bodies, like that of the EU. 

European Economic Commissioner Pierre Moscovici fearing such an outcome has said, “I was never in favour of sanctions. Sanctions are always a failure.”

It remains to be seen which side blinks first or if a compromise solution can be found.