What Really Worries People About The Italy-EU Fight
George Soros thinks the Russian’s did it. They made Italy go nationalist, anti-migrant, anti-Brussels.
Others like The Daily Beast blame Trump. Italy’s Prada and Ferrari sensibilities no longer match the New York-LA-DC worldview. Time to belittle and ostracize.
Both are simple arguments designed to push a political narrative. It is not crystal clear whether a tiny majority believe Russians flipped Italy (and Austria and Brexit and Catalonia, Spain…). I’ve never seen a poll on it. It is also unlikely that Italians are tuned into what Trump is doing or how Trump thinks. They have their own country and their own lives.
But what really worries people about the Italy-EU fight can be found in the history books. You’ll get the answer talking to any expat Italian or an expat Brit concerned over Brexit. When Europe bands together and have each others’ livelihood at stake, they tend to play nice. When Europe closes its doors and gets tribal, history tells us, bombs go off. It is impossible not to see the concern over populist politics in that historical context. The two biggest world wars started when one European country blamed its problems on another European country.
Italy chose nationalist leaders because of Brussels. It’s their fault. No one is voting for Lega and Five Star because they hate globalization. You don’t see Italians rising up in protest against Chinese companies making inroads there. Instead, you see them protesting austerity being ordered from on high by people none of them elected. Instead, you see them protesting against hundreds upon hundreds of migrant men—not migrant families, not migrant women and children—piling in on Zodiacs. That is how Lega and Five Star came to be. Because globalization hasn’t changed in the last 10 years. But since the housing crisis and since the destruction of Libya and, to a lesser degree, Syria, austerity and immigration policy has.
So looking in the rearview, what is worrisome here is you have a nation-state rising up against “the other”—the outsider, the minority—and blaming another state for the chaos. We have seen how this ends in Europe, and it does not end pretty.
The billionaire investor Soros is right in one respect: If the EU punishes Italy, it does so at its own risk.
There is a strong inclination in Europe to use the occasion to teach Italy a lesson. If the EU follows this line, it will dig its own grave by provoking a negative response from the Italian electorate, which would then reelect the Five Star Movement and the League with an increased majority. Rather than try to teach Italy a lesson, the EU should ask itself: What can Europe learn from the upheaval in Italy? Historically, Italy has always been the strongest supporter of the EU because Italians didn’t trust their own governments. And with good reason: Those governments had a tendency to be corrupt and to follow policies that didn’t serve the interests of the people. But the EU must not punish the Italian people for the sins of its governments.
The View from Wall Street
On Thursday, the iShares MSCI Italy (EWI) ETF was down half a percent, underperforming the FTSE Europe Index. The 10-year bond also went to 2.95% by late morning, up from 2.9% on Wednesday. Investors are selling.
On the economic front, since forming a new government, Prime Minister Giuseppe Conte reaffirmed plans for increased social spending, anti-austerity tax cuts and reduced immigration.
Conte pressed the case that the new coalition government of Five Star & Lega have a popular mandate for “radical change.” He doubled-down on pushing against Brussels’ call for spending cuts and taxes. They are also talking about a flat tax, though that will get pushback from the European Parliament. Leading the push for the flat tax is Lega leader Matteo Salvini, who told markets on Wednesday that he was drafting a new tax plan. Fiscal conservatives in Germany and Belgium probably won’t like it.
Some of the early statements coming from Lega senators suggest that a 15%-20% flat tax on companies will be implemented sometime in 2019 , with hopes for a 15%-20% flat tax on individuals in 2020 if they can hold onto power.
In response to Conte’s speech, Angela Merkel promised to talk to the Italians and get them to agree that “all should follow the same rules” if they are in the European Union. She was referring to the Stability and Growth Pact (SGP) that requires EU-member governments to have a debt-to-GDP ratio no higher than 60%, and a government deficit of no greater than 3% of GDP. That’s wishful thinking for Italy. Their debt-to-GDP is over 130%, though their deficit is under control by EU guidelines.
Investors have been waiting for a worse-case scenario to unfold in Europe since the Greece crisis began nearly 8 years ago. Greece is still, quietly, a member of the Union. It is still holding onto the euro. It never left. Whether the same will hold for Italy all depends on how Brussels treats them on the economic front. It appears fairly certain to say that the EU will no longer roll out the welcome mat for migrants en masse as they have since 2014. Austerity is a hard thing to rally against in Europe. Mass immigration, on the other hand, is an easier rallying cry for the populists many people fear will return Europe into a tribal, us-versus-them continent. For now, such an outcome is not the base-case scenario for Europe.