There was a time, not long ago, when Nicolas Sarkozy and Angela Merkel (former French and German political leaders) successfully plotted the demise of Silvio Berlusconi, Italy’s longest serving post-WWII prime minister.
And then, Italy’s promising former Prime Minister Matteo Renzi, a savvy political operator, a noted reformer and a feared opponent (with a nickname of “rottomatore” – the shredder) publicly complained that he was tired of learning from the media that France and Germany were making E.U. decisions without any consultations with other member countries.
But that was then. The current French president is now blocked by a hostile parliament -- a rather unusual position in a strong presidential system of the V Republic -- while the German chancellor looks weakened by a feuding and unstable coalition.
Regrettably, that political vacuum is occasionally filled by E.U. officials intervening in elections of sovereign member states and in domains reserved for the union’s heads of state and government.
A dangerous disarray
Some countries, however, have become more assertive in defending their rights and policies. Hungary, for example, offered the first example of such behavior by telling the Germans that they “will not be deciding who will live in Hungary” -- a broadside fired as Berlin was imperiously distributing quotas for resettling migrants throughout the E.U.
Germany’s open-door policy in 2015 to manage its labor shortages had unleashed huge migrant and refugee inflows from the Middle East and north Africa.
Europeans are still unable to stem that tide. E.U.’s disorderly immigration policies remain a huge issue. They recently led to a radical political change in Sweden. Immigration is also a perennial problem in France, where immigrants’ integration difficulties dominate the political platform of a powerful right of center party.
Apart from a poorly managed immigration, France and Germany have also presided over E.U.’s successive economic crises. They are now helplessly looking at their ineffective trade policies, a runaway inflation, sinking euro assets and declining jobs and incomes.
Is it any wonder then that Italians have now reached out for a government whose new leader promises an “Italy First” policy?
We have yet to see what that policy will be.
Meanwhile, a quick look at Italy’s urgent action areas reveals three issues: inflation, unemployment and public finances, in that order of importance.
Italy’s inflation in August came in at 9.1%, matching the euro area average, but marking a nearly four-fold increase from 2.5% in August 2021. The core inflation rate (excluding energy and unprocessed food) of 4.4% shows that this is an essentially energy driven flare-up that accounts for more than half of the country’s headline inflation number.
Italy has urgent work to do
That is quite unfortunate because Italy’s underlying inflation – nominal hourly labor costs – of 3% is way below Germany’s 4.7% and the euro area average of 4%.
The solution, however, is simple and urgent: Italy has to find energy supplies to cut costs and avoid the quickly spreading second round effects of energy prices currently rising at an annual rate of 47.9%.
Energy saving and energy sharing through alleged E.U. solidarity networks are fairy tales and political games. The real solutions require (a) a complete revision of E.U.’s trade limitation policies, and (b) a peaceful solution to the raging proxy war in central Europe.
Doing nothing and allowing exploding energy costs to feed accelerating inflation is a road to a deep economic recession, with rising unemployment and poverty rates – and disappointed expectations of “Italy First” election promises.
Indeed, Italy’s current unemployment rate of 7.9% stands above the euro area average of 6.6%, and it is more than double Germany’s 2.9%. Particularly devastating is Italy’s 24% youth unemployment rate -- 17% of the euro area’s total. Italy cannot afford to have 371 thousand of its young people without jobs and a meaningful future.
Italy’s parlous public sector finances are an old problem that is certain to get worse with declining economic activity. The budget deficit in the first quarter of this year doubled to 9% of GDP from the previous two quarters’ average. Worse, the budget gap is nearly triple the euro area average of 3.3% -- and a far cry from Germany’s balanced public sector accounts.
Predictably, at this writing the yield on Italy’s government ten-year bond soared to 4.553%, showing a widening 2.443% spread with the equivalent German debt instrument.
So, there it is. The new Italian government has an urgent work to do. Its key leaders know that failure cannot be an option. And they may also wish to think that they will get a limited cooperation – or none at all – from trade partners who were openly dreading their victory.