Italian populists will find it easier to complain than to govern

Well one of my 2018 New Year predictions is bearing fruit. I predicted that the big issue in 2018 for the EU would be Italy, and its push back on how the Euro is run. Just how this will play out is very hard to judge, but it is now centre stage. Most of the coverage centres on threats by Italy's Five Star Movement (M5S) and the Northern League to take Italy out of the Euro. But the politics of that is much trickier than many give credit for.

It is, of course, too easy for liberals like me to sneer as the disparate group of politicians we refer to as "populists". The popular frustration they play on is real enough, and liberals are very reluctant to engage with it. We seek for ways round it and dismiss it. But for all the weakness of established political movements, populism does represent a threat to European (and American) society. What populists aim to do is stoke up a sense of grievance and victimhood to secure power for themselves, which they then proceed to use to for the purposes of self-enrichment and cronyism. Nobody should be surprised that a movement built on resentment at elitism and cronyism should, in practice, be much worse than the system it is replacing. Donald Trump made hay from Hillary Clinton's minor lapses in data security, and talked of "draining the swamp" in Washington. And yet the new governing elite plays fast and loose with security and thinks nothing of placing its own friends and relatives in positions of influence. Its supporters don't seem to mind.

The populist system in Europe is most advanced in Hungary, where under Victor Orban's Fidesz a crony state is becoming deeply entrenched. It is worth noting that when Fidesz first emerged from the post-Communist gloom it seemed fresh, modern and innovative. It has been corrupted by power. But Hungary does have some advantages. First it can claim subsidies from the European Union because of its relative lack of development. Second it has its own currency, so it is not beholden to the system of Euro governance. But note a key element of the system: it requires EU subsidies to keep going, and anti-EU resentment is one of its key themes. Staying within the system while complaining about it ever more loudly is Fidesz's central political strategy.

The Italian populists are embarking on a similar strategy. I am perhaps being a little harsh on M5S. Its hatred of the old establishment cronyism is genuine and it does seem to want to move to something better. It refused to deal with Silvio Berlusconi, one of the pioneers of populist cronyism, for example - though its more cynical Northern League allies had long been associated with him. And yet Italy's economic predicament makes something like the classic populist trajectory almost inevitable.

The central issue for Italy is the Euro. Both M5S and the League make this a central complaint. They complain that the Euro's budget rules are too tight and prevent sensible fiscal policies from being implemented that might help lift Italy's dismal economic growth rate. Plenty of economists from across the world agree with them. How much substance there is to these complaints is a complex topic for another time (my answer: yes some, but nearly as much as many make out). The real question for populists is just how serious about this do they want to be. Do they want to make genuine, credible threats to leave the Euro? The answer is surely not.

It is, in fact, institutionally and practically very hard to leave the Euro once you are in it. For all its extreme problems, Greece never seriously contemplated it. But there is a political problem too, which, for example, cost Marine Le Pen in France dear when she seemed to be on the threshold of power. That problem revolves around two things: interest rates and savings. One of the main reasons Italy joined the Euro was to reduce interest rates, especially on government debt. It should be remembered that, contrary to the populist narrative, Italy was not bullied and cajoled into joining the Euro by the Germans. The Germans never wanted them in, but Italy made it in thanks to both some fairly hefty austerity economics and diplomatic skill. This proved very successful. If Italy left the Euro, the country would surely have to raise interest rates on its debts and government finance, including a looser fiscal policy, would in fact be much harder. That is exactly why Italy joined the Euro and the basic dynamics haven't changed. And this would not be some future prospect (like the dire predictions made about the British economy after Brexit), but would be immediately apparent should the prospect of Italy leaving the Euro look real. The rise in Italian government bond prices after the populist victory at the polls shows this.

The economics may not be quite as simple as I have made it sound. The Italian economy, for all its weakness, is roughly in balance on trade, which makes looser fiscal policy and monetary policy much easier - but that was true before. The real problem is that successive Italian governments have been unwilling to take on the economic reforms that might make the economy more productive, and a looser fiscal policy more sustainable. It is a popular misconception on the left that "Keynesian" loose fiscal policy can drive growth and pay for itself. That is only true of there is spare productive capacity, such as in a recession, or if productivity reforms form part of the government programme. In fact the left usually see "Keynesian" policy as an alternative to "neoliberal" reforms rather than a complement to them. I have written often that neoliberal reforms are played out - but that is not true of Italy, which used the gains made from joining the Euro to put off the evil day. The populist movement draws much of its strength from resistance to such reforms when they were belatedly embarked on by the Socialist government of Matteo Renzi - so embarking on a reform programme looks out of the question.

Still, politically, the interest rate problem is not the most serious. That is that leaving the euro would be seen as a threat to many Italians to the value of their savings. Economists talk about currency as a means to an end - a sort lubricant to help achieve real economic gains through higher levels of investment and consumption. Money means nothing in itself. But most people outside the elites have a different view. To them money is a sacred promise made by the government to the people that they can save now to spend later. Politicians forget that at their peril. If Italian savers start to think that threats to leave the Euro are serious, they will see a threat to their savings and support will drain away from M5S and the League faster than most people think is possible.

And so the populists need to maintain that balance: whinging about victimisation within the Euro straitjacket, while making no serious attempt to leave the system. This sort of have-your-cake-and-eat-it politics is, as it were, bread and butter to populist politicians. But it will surely be harder inside the Euro than out.

This is doubtless behind the Italian President Sergio Matterella's rejection of the coalition's proposed finance minister. What looked like a clumsy denial of democracy could in the longer term be part of a challenge to the populist parties to put up or shut up about the Euro. That could pay dividends if only the established political parties to put up a credible alternative government.

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