December 1, 2023

Inside Europe: Jolt From Italy’s Elections May Not Be Enough

BRUSSELS — European policy makers should be asking themselves, “Who lost Italy?” after a grass-roots revolt against austerity, unemployment and the political elite caused an electoral earthquake in the country, the third-largest economy in the euro zone.

Instead, most still insist that their policy mix for fighting the currency area’s debt crisis is right, even though the latest E.U. forecasts have pushed any prospect of meaningful economic recovery in southern Europe back into the middle distance.

A surge in support for the anti-euro populist Beppe Grillo and the surprise resurrection of the former prime minister Silvio Berlusconi on an anti-austerity platform in the election last week have forced Rome into political deadlock.

Italy, which had been governed by the respected technocrat Mario Monti for the 15 months since Mr. Berlusconi’s last government fell, is hardly the country worst affected by the 3-year-old debt crisis. Unemployment there stands at 11.7 percent, less than half the rate of Greece and Spain, where one of every two young people is without a job.

If a milder recession and less-severe spending cuts and tax increases can cause such a social and electoral revolt in Italy, the risks of an explosion in Greece and Spain ought to be greater. Yet the official reaction from Brussels and Frankfurt is to act as if nothing — or almost nothing — has happened.

“The crisis is not yet over and efforts must not be relaxed,” the European Commission president, José Manuel Barroso, said in a joint statement with Mr. Monti two days after the election.

At a Reuters forum on the future of the euro zone, Mr. Barroso appealed to European leaders to stay the course and “not give in to populism.” Despite bleak economic forecasts, structural overhauls were starting to bear fruit, he said.

Mr. Barroso reeled off figures showing that current account deficits in Portugal, Spain, Italy and Greece were shrinking and Ireland was back in surplus. Exports from Spain and Portugal were rising, and the labor competitiveness gap between Northern and Southern Europe was narrowing.

Those numbers have another side, however. Payment imbalances are down mostly because those countries’ imports have shrunk because of sinking demand. The labor cost gap has declined largely because of mass layoffs in southern states, rather than productivity gains. Exports account for less than 20 percent of output in Spain and Portugal, less than half the German ratio and too little to offer a fast track to recovery.

While the European Central Bank removed the danger of a financial meltdown of the euro zone with its bond-buying plan, there is now a growing risk of a social crisis that could lead to the departure of one or more southern countries from the currency group.

“I absolutely think it can get a lot worse,” said Clemens Fuest, the incoming president of the ZEW economic research institute in Germany.

“There is really the current plausible scenario for a breakup of the currency union,”’ he said at the same forum. “It may very well be that in these countries at some point the population will say, ‘We don’t believe things will get better.”’

The degree of despair would have to be high to risk leaving the euro group, “but if things continue, if unemployment goes up to 30 percent,” he added, “in Spain, there certainly is a danger that might happen.”

Zsolt Darvas of Bruegel, a study group in Brussels, said South European countries would be trapped in a downward spiral of economic contraction and rising debt for some time to come but had no alternative to fiscal consolidation.

The only way out was to alter Europe’s fiscal policy mix by stimulating demand in Northern Europe, notably with tax cuts in Germany, and giving the European Investment Bank a huge capital increase to lend to companies in Southern Europe, he said.

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