As we discuss in our latest podcast episode, Italy is a microcosm of the European Union. The north is one of Europe’s most prosperous regions, a crossroads of trade and industry. The south is a perennial periphery, dogged by persistent poverty and structurally high unemployment. In the north, people ask why they should bail out their southern brethren. Indeed, the populist Lega, one of the country’s most powerful political parties, was originally the Lega Nord, a party that preached secession and practiced the pursuit of autonomy for northern regions. The south holds grudges of its own, caricaturing northern industry as rapacious and exploitative. Sound familiar? It will if you’ve followed the politics of the European Union since 2008.
The Covid19 pandemic has had many immediate consequences, national and international. One of them is a renewed discussion about Italy’s place in the European Union. It isn’t new that leaders from Europe’s north are fighting with those from Europe’s south about money. But this time, there is a real possibility that an already contentious row may trigger profound changes — so profound, in a worst-case scenario, as Italy leaving the European Union.
Right now, northern European countries are adamantly refusing to share their wealth with those in the south. The discussion once again centers on Italy.
Covid-19 has sent economic shockwaves that are hitting every country hard, but countries that were already suffering have been hit hardest. Italy – all of Italy – has had lackluster economic growth. Successive Italian governments in the last decade have made deep cuts in exchange for support from the European Central Bank (ECB), which demanded structural reforms to the Italian economy and social-economic fabric. Yet national debt levels have continued to rise far beyond what Italy agreed to when it entered the eurozone league of nations.
And now Italy stands on the brink. Like most countries, Italy raises money on capital markets by selling sovereign bonds. Those stand to be downgraded by credit rating agencies who will wonder whether Italy can meet its payment obligations, specifically for the refinancing of outstanding loans. Italy has been able to borrow at low interest rates over the past 10 years, largely thanks to the liquidity measures provided in European capital markets by the ECB. But as the economic and financial effects of the pandemic set in, a lack of faith in Italy’s ability to refinance itself now threatens to drive up interest rates. This is because lenders want insurance against payment problems or – in the absolute worst case scenario – a default on loans.
“Italy stands on the brink.”
While interest rates were low and the Italian economy buzzed along at lukewarm growth rates, lenders had few qualms about swapping old Italian bonds for new ones. Now they are getting worried. In other words, the ghosts of 2009-2010, the high watermark of the European financial crisis, are back — and they’re angry. It is the consequence of a fight that was never properly resolved.
The two main protagonists are the Netherlands and Italy, and neither is willing to compromise. Over the past weeks, leaders of both nations have lashed out at each other in heated video-conference meetings organized by the chairman of the eurogroup, the collection of EU member states that share the euro as their currency. The ongoing fight between the Netherlands and Italy has led statesmen elsewhere to make unprecedented statements. Portuguese Prime Minister António Costa went on record to call the Dutch stance “repugnant,” while Germany’s finance minister signaled that his country was willing to compromise beyond what a consistently rigid Berlin has offered in the past. But the Netherlands and Italy have refused to give a centimeter. Let’s look at what their positions are.
Italy’s point of view
To meet the threat of downgrades and of a spike in interest-rate payments, Italy has revived the idea of eurobonds — something it proposed as early as 2008. To cut a long and quite technical story short, this would mean risk sharing. The government bonds of all eurozone nations would be placed into one basket named ‘eurobonds.’ This would flatten the differences among the sovereign bonds of all those nations.
This would mean that instead of each country having to ride its own fiscal wave, there would be one single, very big wave that all would ride together. In the telling of proponents, this wave would lift all boats. It would reduce the differences in ratings among the various bonds to one broad, median rating. So, if one bond has a BBB+-rating – only one step removed from ‘junk bond’ status, or ‘radioactive’ and thus expensive – it would be mixed with several bonds that carry A+-ratings. The bond would land in a safe place, somewhere between those values.
Italy’s current government is a coalition joining the anti-establishment Five Stars Movement, or M5S, to the center-left Democratic Party, and this coalition has refused any proposal that reeks of going into receivership. One such compromise that has been put forward by eurozone nations like Germany is to let Italy use funds from the European Stability Mechanism, or ESM.
That fund, holding €410 billion, was set up after the financial crisis to aid countries in need. It used the eurozone’s plan to aid Greece as a blueprint. Aid from that fund is conditional, though. Acting as a European ‘IMF’ of sorts, countries who apply for its aid also have to agree to structural economic reforms.
This is Kryptonite in Italian politics. Since the eurozone countries in their own way conditionally provided aid and liquidity to Italy through the European Financial Stability Facility and the ECB, successive Italian governments have had to perform deep and very unpopular budget cuts. Opposition to these cuts helped propel M5S and – more crucially – the Lega party of Matteo Salvini to great gains during the last general election.
Not a day goes by without Lega’s Salvini warning Prime Minister Giuseppe Conte not to agree to any new budget cuts. As a result, Conte has dug himself in deep, demanding that the eurozone countries acquiesce to eurobonds. To the Dutch demand of no to eurobonds, period, Rome counter-demands yes to eurobonds, period. Between these two trenches, the other eurozone nations like to frame themselves as being in no man’s land. Because each eurozone member has a right of veto, ending the battle is no easy feat.
The Netherlands’ point of view
Throwing higher-risk bonds in with lower-risk bonds could mean that the median risk of the latter bonds goes up slightly, elevating their premium above that which some nations are paying.
Thus, the Dutch government reasons, loaning money on capital markets could become more expensive for them – and they will have none of it. “We will not accept eurobonds in any way, shape or form,” Dutch Prime Minister Mark Rutte and Finance Minister Wopke Hoekstra have repeatedly said. In fact, opposition to eurobonds is enshrined in the 2017 agreement that guides the parties in the Netherlands’ governing, center-right coalition.
“Rutte’s and Hoekstra’s positions are rooted in long-held Dutch suspicions of Italy’s motivations, especially among the right-wing parties in parliament.”
As for aid from the ESM fund, that can only happen when the applicant adheres to the conditions that come with it. Just as Italy’s Conte cannot sell ESM aid with conditions to his parliament, so Rutte and Hoekstra cannot sell it without them — and a vast majority of parties in the Dutch parliament agree with them.
A parliamentary motion that reconfirmed Rutte and Hoekstra’s position was widely accepted, bolstering their opposition to any compromise on the matter less than a year before national elections, which are slated to take place in March 2021.
Rutte and Hoekstra’s positions are rooted in long-held Dutch suspicions of Italy’s motivations, especially among the right-wing parties in parliament. They are convinced that Italy’s body politic does not really want to engage in structural reforms of the Italian social-economic institutions and would rather have someone else pay their debts.
Back in 1998, the VVD – currently the biggest party in parliament, now headed by Rutte in government – openly voiced its opposition to Italy becoming a member of the eurozone. Then-leader Frits Bolkestein opined that Italy should not become a member of the European Monetary Union, the precursor to today’s eurozone, because the country’s national debt stood at 122% of gross domestic product. The rules of the Stability and Growth Pact – the political foundation of the eurozone – stipulate that a member-state’s national debt may not exceed 60% of GDP.
(Note: this specific percentage rule on national debt is a non-enforced guideline. On the other hand, one rule of the Pact is that an applicant nation may not have a budget deficit exceeding 3% of GDP. If a member-state exceeds that level, fines are levied.)
The mistrust of Italy’s fiscal conduct is widely held in the Netherlands, and it is a political frame that right-wing and hard-left parties in particular love to reference. Rutte has headed three successive governments since 2010. In that time, which included the apex of a financial crisis that saw many EU countries spend billions to prevent a collapse of the financial sector and their respective economies, his governments performed budget cuts to the tune of some €50 billion.
Many Dutch voters believe that the Italian official retirement age lies somewhere between 52 and 60, a refrain that was repeated by Hoekstra in parliament the other day, when he quipped that while the Dutch official retirement age is now 67, “in other countries it’s 60.” The slur was missed by no one.
(Note: the official retirement age in Italy is 66 years and 7 months at the time of this writing.)
So, the Dutch framing goes, the Netherlands was frugal and sober in its spending, whereas southern European countries “spent their money on wine and women,” as then-Dutch Finance Minister Jeroen Dijsselbloem once famously quipped.
That comment infuriated governments south of the Alps, who had in fact gone through years of hardship and austerity; Dijsselbloem later apologized.
‘So, the Dutch framing goes, The Netherlands was frugal and sober in its spending, whereas southern European countries “spent their money on wine and women”’
Other European nations, including the biggest ones, aren’t exactly pleased with the Italo-Dutch spat. If it continues to escalate, the fight could well lead, at best, to total political gridlock within the European Union. At worst, an Italian exit from the Union or some of its structures becomes possible.
In an effort to sooth tempers, the German government – which is just as against the idea of Eurobonds as the Dutch – proposed opening up ESM funds to Italy without conditions, while safeguarding it so that other nations wouldn’t be able to do the same and treat it like an open buffet.
But the Dutch refused. A subsequent proposal would allow a little over half of the money in the ESM fund be taken out and distributed. Hoekstra reacted to this by harkening back to the old Dutch framing on Italian politics. Conte insisted that financial backing by the other EU member states was necessary to help Italy get through the medical crisis caused by COVID-19.
So Hoekstra, according to inside sources quoted by several outlets, said he would be willing to support taking €250 billion out of the fund for medical aid to member-states, including Italy – but only for medical aid. It was not supposed to be used to back up Italian government bonds.
So, in effect, Hoekstra said the Dutch were willing to forward some money, but only if Italy would agree to show receipts confirming that the expenditure was for medical purposes, and not to back up Italian bonds.
This stance infuriated French Finance Minister Bruno Le Maire, who has tried to mediate the dispute. Le Maire went on record to say that the only ones to block the ESM compromise were the Dutch. This ran counter to Hoekstra’s contention that most eurozone countries backed his position.
If you managed to read all of the above without feeling like your kindergarten days when it was someone else’s birthday, we at Atlantic Anchors salute you.
Behind all this lie the exigencies of national politics. Political leaders are accountable to their voters, and the elected constituents of these two nations have their backs to the wall here. Both sides have a lot to gain but they also have a lot to lose.
The Netherlands elects a new government next March. The ambitious Hoekstra wants to become his party’s leader and the nominee to replace Rutte, 10 years after Rutte’s VVD lured voters in droves from Hoekstra’s Christian-Democratic CDA party. The CDA has vowed revenge, yet both parties are vulnerable to their right: Radical-right, populist parties like the Freedom Party, or VVD, of Geert Wilders, and the Forum for Democracy of newcomer Thierry Baudet, are waiting to seize upon any sign of weakness or compromise vis-à-vis Italy.
In Rome, Conte occupies a unique niche. Politically unaffiliated, he is seen as close to the M5S, an anti-establishment party whose voters largely migrated from the political left and that has been suffering in the polls ever since it agreed to form a coalition government with the hard-right Lega of Matteo Salvini in 2018.
After a miscalculation by Salvini, who blew up the government in hopes of new elections, the M5S – which was already suffering in opinion polls – decided to team up with the center-left Democratic Party instead of allowing for new elections. Since his mistake, which cost him his bully pulpit as deputy prime minister, Salvini has been losing seats in opinion polls – including to Fratelli d’Italia, a hard-right party to which at least some of Salvini’s disillusioned voters are flocking.
And so Salvini has been trying to drown out not just the Fratelli, but also what remains of the M5S in the polls, making increasingly harder demands that Conte show no quarter. Salvini has said that he would rather see Italy exit the European Union, with all its consequences, than to cave to external demands. Though, it should be added, Salvini has said a lot of contradictory things about Italy’s EU membership.
Should Conte agree to a new austerity program, he risks handing the keys of government to Salvini, whose Lega is very likely to make strong gains in any new general election. Having Salvini in the lead could put Italexit on the table.
All in all, the situation is perilous. All parties in the conflict appear to have stopped communicating informally and are instead engaging in open-letter diplomacy via op-eds in each other’s national newspapers. The Spanish and Italian prime ministers have been trying to mold public opinion in Germany and France – believing that if those two bow, so will the Netherlands – while German government officials and the Dutch finance minister have been offering their points of view in op-eds in Italian and Spanish newspapers.
So far, all the ink has only led to further recriminations. Unless some miracle happens in the shape of one of two sides backing down, ensuring defeat at the polls, more ink is sure to be spilled two weeks from now. The risk is that ink could eventually spill on Italian divorce papers. Which, some Dutch contend, would be a kind of victory in itself.