Italy’s woes are another blow to the European project (as currently constituted)

Italy has been particularly badly hit by Covid.  And recent reports suggest that there is a great deal of anger at the failure of the EU to provide more aid.

Nor is Italy well placed to deal with the economic fallout.  As Financial Times commentator Wolfgang Munchau points out, its high levels of public debt could well be headed to Greek-style levels.

“As of the end of last year, Italy’s public sector debt was 136 per cent of gross domestic product. Over the previous decade, it had increased by 30 percentage points. If you assume that what the IMF calls the Great Lockdown leaves Italian GDP 10 per cent lower than in 2019, and if outstanding debt increases by 20 per cent, then its debt-to-GDP ratio balloons to 180 per cent.”

His conclusion is that Italy is in more danger than the eurozone will acknowledge:

“It is hard to overstate the turn to Euroscepticism. It will not go away when lockdown ends.”

So plenty more opportunities for resentment to fester, already giving rise to ‘Will Italy follow the UK out of the EU?’ speculation.

This looks premature.  The EU has developed the way it has because it has proved a surprisingly successful mechanism for managing (if not always solving) European political problems.  It’s a process, with infrastructure attached. Political elites prefer it (including plenty in the UK), even if their electorates do not.

Greece’s case accords with this view.  A violently populist government decided in the end it was better for Greece (and for them) to take a marginally-attractive EU-financed debt restructuring, rather than repudiating and exiting.

But some version of what France’s President Macron termed an “unravelling” looks more likely.

Hence, a more profitable way of framing the question might be: if the EU’s hitherto-successful strategy (in essence, more detailed political and economic integration) is no longer working as well, does it have to adapt, and institutions and structures with it.

Brexit is a case in point.  Closer integration was particularly unattractive to the UK, with a large, relatively open economy and political and cultural traditions more distanced from the EU’s Franco-German culture.  Nonetheless, the EU leadership has shown remarkable tenacity in fighting a rear-guard action in defence of an integrationist strategy, even to the extent of sacrificing relations with the UK.

So if Italy does get into more trouble, the first choice solution will be integrationist, binding Italy (and other member states) more firmly into EU structures in return for a bail-out.  It could work – but at the risk of further alienating the voters (mostly German and Dutch) who would have to pay for it.

Moreover, the post-Brexit relationship with the UK may well hinder further EU integration, particularly if the current trade talks between the EU and UK continue to falter (as we reported a few days ago).

Post-Brexit, each of the EU’s 27 member states must decide what sort of relationship it wants with the UK (within the EU framework and subject to any trade deal).  Each has an incentive to preserve its economic integration with the UK: facilitating trade and investment (except where there is a narrow national political payoff e.g., industry protection).

So they will presumably look to cushion the impact of Brexit inside their own borders and argue at the EU level for trade measures which do not harm their national exports.  Which, at the margin, increases the costs and reduces the benefits of further EU integration. 

It is the mark of long-lived imperial projects that they can adapt to circumstances.  Let’s see how the EU’s institutions manage this over the next few years.

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