Italy and the ghost of 2015

Frances Coppola in a piece from last Thursday, The Eurocrisis Is Back And It Could Be Uglier Than The Last One Forbes 05/31/2018, comments on the looming clash between the Italian government coalition of Five Stars and the League, on the one hand, and the EU establishment, on the other.

She judges that the coalition's political program amounts to "a toxic mix of right-wing and left-wing handouts, with a hefty dose of xenophobia and Euroscepticism" that represents "a major attack on the Eurozone’s governance model."

The coalition is demanding that the fiscal and monetary rules that hold the euro together be reformed to suit its own agenda. This is not going to go down well in Brussels. Even more importantly, it is not going to go down well in Germany. The new finance minister, Olaf Scholz, is every bit as committed to fiscal discipline and austerity as his formidable predecessor, Wolfgang Schaueble.

They are right to demand an end to Herbert Hoover/Heinrich Brüning austerity policies. But the somewhat vague left policies of Five Star and the nationalist/xenophobia orientation of the League are likely to be an unstable mix. And maybe downright toxic.

And they are likely headed sooner rather than later to a conflict with the EU and Angela Merkel in the lead that will be a lot like the one in Greece in 2015. Like Greece, it has a debt load that it cannot indefinitely support under the current eurozone arrangements. And austerity policies imposed by the Troika have left Italy with a stagnant growth rate for years:

Since 2001, Italy’s GDP growth rate has averaged less than 1% per annum, and it has several times dropped below zero. When GDP growth is very low, debt/GDP does not fall even if the country runs primary surpluses. This is what is happening to Italy. It has a huge historic debt burden that it is unable to reduce, and the Eurozone’s fiscal rules actually make matters worse, since persistent austerity tends to depress GDP growth.

It's going to be a bumpy ride.