Italy is too large to save but cannot be left to fail. Eventually, something has to give

While Giorgia Meloni claims she wants her country to stay in the eurozone, its deep economic problems might pull her in another direction.

By Wolfgang Münchau

When Giorgia Meloni was the clear favourite to win last October’s Italian election, a lot of people panicked. She is the leader of a far-right party with historic links to fascism. Four months later, the rest of the world is relieved. She has not defaulted on Italy’s debt or picked fights with the EU. Knowing which battles to fight and which to avoid is a quality of political intelligence. She seems to have that.

Yet, the notion of a far-right politician who is also intelligent does not give me peace of mind. Viktor Orbán, Hungary’s prime minister, began as a moderate conservative before becoming increasingly autocratic. It is hard to believe these days, but Vladimir Putin spent his first years in power wooing Western politicians such as Bill Clinton, Tony Blair and Gerhard Schröder. The annexation of Crimea happened in year 14 of his reign, the invasion of the rest of Ukraine in year 22.

Italy does not pose a military security threat to any of its neighbours. But it poses an economic security threat. The biggest foreseeable accident would be an Italian departure from the eurozone. Meloni says she has no plans to do this. I believe her. She does not define herself in opposition to Europe. She has learned from the mistakes of Matteo Salvini’s Lega and the anti-establishment Five Star Movement. Their coalition in 2018 briefly toyed with the idea of a parallel currency for Italy. But they were incompetent and unprepared. Now, nobody in their right mind would try it again.

But that does not settle the issue. Meloni is dangerous not because of what wants to do now, but because of what she may need to do later to remain in power. Leaving the eurozone may one day become her only viable option.

Since the ousting of Silvio Berlusconi during the euro crisis in 2011, there have been seven Italian prime ministers including Meloni. Mario Draghi and Mario Monti were technocrats. Giuseppe Conte, Enrico Letta and Paolo Gentiloni were transitional figures who had little impact. Matteo Renzi was the most flamboyant. He passed a few important labour market reforms, but ended up misjudging the public mood.

The real reason they all got booted out was their failure to address the lack of productivity growth – the deep cause of Italy’s economic misery. Italy has had virtually no productivity growth since it joined the euro. Data from the University of Groningen in the Netherlands shows that in the 2014-19 period the eurozone as a whole had annual productivity growth of 1 per cent. The UK had 0.6 per cent. Italy had 0.2 per cent. For 2018-19 only, Italy’s productivity growth was -0.2 per cent.

One of the consequences of absent productivity growth is regional poverty traps. When Italy joined the euro the big economic gap was between its wealthy industrial north and a hopeless south – the Mezzogiorno. Today, areas of abject poverty and desolation are now scattered around the country. According to a study by the European Commission, 13 out of Italy’s 21 regions have entered a doom loop of emigration, low educational attainment and low investment. This includes parts of Italy’s otherwise prosperous north. Italy has one of the worst demographic outlooks of all EU countries and the second lowest proportion of graduates among 25- to 64-year-olds, and it badly needs immigration to fill jobs.

No prizes for guessing where Meloni stands on the issue of immigration.

[See also: The strange death of the centre right]

There are parallels with post-Brexit Britain, except that the situation in Italy is much worse. Italy has less fiscal space, a much greater wealth gap between the richest and poorest regions, and politicians who do not even pretend to be “levelling up” because no one would believe them.

An obvious solution sought by Meloni is fiscal transfers from richer EU countries. When the pandemic hit Europe, the EU arranged such transfers for the first time ever, agreeing a fund of €310bn in real money, to be distributed over many years. Italy received nearly €70bn for investments in green technologies and digital infrastructure. Linked to those grants are economic reforms. Some have been enacted, but the pace is now slowing down.

Even my Italian friends, who tend to be more optimistic than I am, do not see noticeable productivity growth arising from the investments. Unlike Renzi, Meloni is not a reformer. She is a pragmatist, but not willing to spend political capital on pushing through changes. And northern EU countries, most importantly Germany and the Netherlands, are baulking at the idea of further fiscal transfers to help the south.

So here we are with an impossible triangle: Meloni says she has no plans for a euro exit. She also has no plans to solve the underlying problem. And the eurozone has no plans to save Italy. Italy falls into the category of countries that are too large to save and too large to fail. But eventually, something has to give.

It is, of course, possible that she is not as smart as we think she is. She might delude herself about her own popularity and meet the same fate as her six predecessors.

For as long as Italy does not have a strategy to deal with its productivity growth problem, you cannot attach a zero probability to an Italian euro exit. None of the problems that became apparent during the eurozone’s sovereign debt crisis have been resolved. All that would be needed for a calamity to happen is a prime minister who is intelligent and ruthless and who knows how to win elections. You underestimate Meloni at your peril.

[See also: Can Britain ever rejoin the EU?]