7 Jun 2018|

Europe’s problems just seem to grow worse. The huge and continuing dislocation caused by Brexit is bad enough, but the news is also disturbing on several other fronts.

The continued weakening of Germany’s (and its chancellor’s) authority in Europe and globally as a result of the introspection and fractiousness of the new Grand Coalition (Groko) government, and concerns about Angela Merkel’s longevity, have left a vacuum where Germany’s leadership used to be. France’s President Emmanuel Macron has stepped into this breach. But he can do little without a solid partner in Germany. In any case, differences between Merkel’s and Macron’s visions for the future of Europe and the eurozone remain.

The challenge posed to the European project by the continued success of populist/nationalist governments in Europe is also growing. Germany and France (which also have to confront their own versions) now face a large group of European countries with governments that disagree quite fundamentally with the way in which Europe has evolved. They want significant changes, mainly to return sovereignty to national governments and—as they would describe it—to push back against the idea of a Europe run from Berlin.

And all of this comes at a time when the post–World War II bedrock of European security, the transatlantic alliance and the US security guarantee, appears to be crumbling. The Trump administration’s decision to impose tariffs on products from close US friends and allies in Europe has just underlined how much and how comprehensively things have now changed.

Then there’s the Putin factor, with Russia aiming to weaken Europe by fomenting disagreement, including through support for the populist/nationalist parties that are so significantly reshaping politics in the West.

But life isn’t about to get any better for the European project. The crisis has just deepened with the arrival of Italy’s new Five Star Movement (M5S)–League government and, although not quite as concerning, of a new Spanish government.

The bigger problem is Italy, a founding member of the European Union, and the eurozone’s third-largest and the world’s 12th‑largest economy, so not a small or insignificant country. Although Italy’s economy is slowly recovering, with GDP growth this year forecast at 1.5%, it faces endemic problems. To mention a few: a chaotic political system and a parliament that has generally found it impossible to implement any reform; a massive imbalance between Italy’s poor south and its wealthy north; Europe’s second-highest debt-to-GDP ratio at 132% (in absolute terms, Europe’s largest debt); 32% youth unemployment across the country, but vastly higher in the south; and serious issues with some of Italy’s banks.

Extreme popular frustration at this state of affairs, especially in southern Italy, some clever politicking by the charismatic leaders of M5S (Luigi di Maio) and the League (Matteo Salvini), and huge disappointment with the established parties are behind the success of the two groups in the new government.

M5S, a ‘movement’ (not, it has always claimed, a party) founded by comedian Beppe Grillo to give voice to popular anger, ended up as the largest single party after the elections on 4 March this year, with particularly strong support in the south.

The League was part of a centre-right group of parties that included Silvio Berlusconi’s Forza Italia and did very well in the north and centre of Italy. That’s not surprising since the party emerged from the Northern League, which advocated cutting the north away from what it considered the dead weight of southern Italy and gaining independence. This was evident when the newly appointed (League) minister for regional affairs and autonomy indicated last week that her priority was to grant autonomy to Lombardy (Milan) and the Veneto (Venice).

M5S had said it would never enter government as part of a coalition. The League professed loyalty to its centre-right grouping. Both positions were sacrificed in the interests of attaining government. On the face of it, they’re very strange bedfellows, united largely by their opposition to the established system, their very strong anti‑immigrant stance and their deep scepticism about the euro and the European Union. They have an economic policy based on tax cuts, significant financial support for the poor and big government spending, taking on more debt as necessary.

The new government’s euroscepticism, its equivocal position on the euro, its intention, contrary to eurozone rules, to spend its way to economic recovery and its quite virulent criticism of Germany’s and Brussels’ roles in Europe will all put it completely at odds with the approach taken by Merkel and Macron.

The M5S–League government is led by a complete political novice in Giuseppe Conte. But it’s hard to imagine that his two deputies—di Maio and Salvini—will give him much room for manoeuvre. Italian President Sergio Mattarella refused to accept as economics minister the notoriously anti-European Paolo Savona, who once famously described the euro as a ‘German cage’ and speculated about a ‘plan B’ of withdrawal from the euro. But Savona has been made, in yet another weird twist, minister for European affairs. And, to muddy the waters even further, the new foreign minister, Enzo Milanesi, is pro-European: he worked in Brussels and was minister for European affairs in the recent Monti and Letta governments.

According to Simon French, a business commentator, ‘Quitaly’ is the term being used on London City dealing desks to describe a potential departure by Italy from the European Monetary Union. The new government is suggesting publicly that, although it wants fundamental change, it will remain with the euro and the European Union. But given the disparity of views in Conte’s cabinet and among both M5S and League supporters, that must remain an open question, as must the longevity and fortunes of the M5S–League government.

It is just too hard to predict right now how all of this will work out. One thing is certain: it must be almost the last thing that Chancellor Merkel and President Macron (or Europe more generally) needed given everything else that’s happening. It must have been a very interesting conversation between Merkel and Conte when she rang him on 2 June to congratulate him and invite him to visit Berlin ‘as soon as possible’, no doubt to receive some clear advice.