The EU Has Rejected Italy's Budget. That's Just What Rome Wanted.

The EU’s move comes amid growing economic problems in Italy, but the country’s ascendant populists will flaunt Brussels’s decision as a victory.

Di Maio, Prime Minister Giuseppe Conte, and Salvini stand after a press conference in Rome.
Di Maio, Prime Minister Giuseppe Conte, and Salvini leave a press conference in Rome. (Remo Casilli / Reuters)

Since it came to power in May, Italy’s coalition government has always been a marriage of convenience. The Five Star Movement won the economically struggling Italian south with its campaign pledges of a universal basic income, and the right-wing League party won the economically prosperous north with its pledges of tax cuts.

That fundamental incoherence met its biggest test yet on Tuesday, when the European Union rejected Italy’s 2019 draft budget—an unprecedented move against a eurozone country—saying its deficit targets and wishful thinking about growth posed a serious threat to economic stability in Europe. Italy now has three weeks to submit a revised budget.

Europe’s response shows what happens when populism meets reality. But a populist mugged by reality is still a populist—perhaps even more so.

The wrist slap from Europe—or was it a melodramatically slammed door?—is exactly what the Italian government may have wanted. The driving force in the government, Matteo Salvini—the bellicose interior minister, deputy prime minister, and head of the League party—came to power spoiling for a fight with Europe. His senior coalition partner (who comes across as junior), the Five Star Movement’s Luigi Di Maio, also got elected on promises of redefining Italy’s relationship to Europe. Together, they form a government that needs enemies in order to justify its existence. Europe, with its irritating, sovereignty-straining rules and austerity measures, is an enemy.

Sure enough, just after the European Commission said Italy was going against its commitments by submitting a budget that projected a higher deficit than Europe deems acceptable, Di Maio took to Facebook—one of the government’s main means of communication—with a response at once defiant and pouty.

“This is the first Italian budget that the E.U. doesn’t like. I’m not surprised. It’s the first Italian budget that was written in Rome and not Brussels!” he posted. “Considering the damage they did to us first, we certainly couldn’t continue with their policies. We’ll continue to tell the European Commission what we want to do, with respect. But they also have to show respect toward the Italian people and the government that now represents them. We’ll continue to work for the good of citizens with our heads held high.” He closed his message with emoticons showing a flexed muscle, a smiley face, and an Italian flag.

Meanwhile, Salvini posted on Facebook a photo of himself smiling. “We’re going ahead with a smile, Italians ask that of us. We’re convinced we’re in the right. #TeamItaly.” This kind of rhetoric could play well domestically—especially for Salvini, who is the de facto leader of the government and is gunning for more power—until it suddenly doesn’t.

One thing the government might not have fully considered: Besides Rome and Brussels, there are also the financial markets, which have been pounding Italy recently, sending its bond spreads to unsustainable levels. The spread—the most despised term in southern Europe, for years now fodder for populists and pro-Europeans alike—can rise even when borrowing rates fall. A widening spread indicates that investors think Italian government debt is riskier in comparison to German debt than it was previously; it is a way for the markets to express worries over a country’s prospects. These two populist parties won by saying they would get Italy’s groove back so that it would no longer be ruled by spreads. And now look.

“On the one hand, the narrative of victimhood is a very obvious default option and it’s been around for quite some time,” Federico Fubini, an economics writer for Corriere della Sera, told me on Tuesday. “But I think if you look a little bit under the surface, probably they’re scared to death because they had not factored in the financial markets.”

The government’s game of chicken with Europe might backfire. “It might be a lose-lose proposition,” Fubini continued. “If they hold on, it can be very damaging to the economy,” he said of the rising borrowing rates. “But if they step back, there is an element of face loss. So I think it kind of has to get worse before they change tactics.”

Salvini now has to come to terms with the markets affecting his political aspirations. “He doesn’t have a ready answer at hand,” Fubini said. “If pressure increases, that will start feeding into opinion polls. You’ll see him blinking. He’ll rail against Soros or some other conspiracy.”

The question between Rome and Brussels is whether this is the usual European political theater or a genuine clash that could reshape Europe is on the way. In rejecting the draft budget, the European Commission said it would consider expediting a sanctions procedure against Italy. But this might have been a classically ham-handed European response, too, since the sanctions would have to be based on Italy’s 2017 debt targets; that would give the current government political capital to blame the problems on its predecessor. Europe sets rules, populists get elected railing against those rules—the short circuit continues.

In the background of all this is the not-small question of whether Italy actually wants to stay in the eurozone. Here there may be a divide between what Italians want and what the government wants. After campaigning with ambiguous criticism of the single currency, the government has repeatedly said that it has no desire for Italy to leave the euro. Its economy minister, Giovanni Tria, has spent weeks trying to reassure investors that Italy’s economy is sound. But it hardly helps that last month Salvini and Di Maio steamrolled Tria and pushed through a draft budget with a higher deficit target than what Tria, and now the European Commission, found acceptable. Some investors are not so sure whether to trust anything the Italian government says.

More importantly: Do Italians?