logo

News

The Italian Presidency of the EU: Looking for a Policy Shift

Analysis

2014-09-01

by Raffaele Borreca

From the July 1st until the end of December, Italy will be in charge of the rotating presidency of the European Union. Thus, following the end of the Greek semester, another Southern European country which felt its internal political system shaken by the Eurozone crisis has taken the helm of the EU. What can be the contribution of Italy in reviving a European project in disarray? And consequently, will its young and ambitious prime minister, Matteo Renzi be able to strengthen the unity of purpose of the biggest continental economies and to mend the rift between the Northern and Southern members of the Eurozone?

Presiding over all the meetings of the Council of the EU, the presidency is the face of the intergovernmental body of the EU which holds legislative and budgetary powers. The task of the presidency is to carry on with the work on the European legislation and to act as a neutral broker ensuring cooperation among the member states. The management of the broad European policy agenda implies possibilities and constraints. The former derive from the power to determine priorities and accordingly, set the pace to the legislative process. Nonetheless, the ability of the presidency to mark with its own imprint the decisional process is strictly subordinate to the policy inputs coming from the Commission and, above all, from the member states. Finally, the composition of national interests and their transformation in coherent collective policies is the golden rule to successfully reign in the European process. Needless to say, that the lowest common denominator among different policy preferences does not necessarily coincide with the long-term interests of the EU and its citizens. Bearing these institutional limits in mind, one cannot underestimate the specific influence of the country called to assume presidency, in terms of political and economic power as well as of quality and style of leadership.

Italy is the fourth largest economy of the EU in terms of GDP and the third in the Eurozone. Therefore, it is among the top net contributors to the EU budget in absolute terms, while the Italian central bank is the third contributor to the European Central Bank capital. In these numbers we can see why Italy is “too big to fail” and why trouble in Italian economics could give the fatal blow to the Eurozone. At the same time, the Italian economic and financial fabric is so interlinked to the common market and the Eurozone that the political leaderships in Rome simply cannot afford to stay at the margins of the European decision-making or be in strain relations with Brussels or Berlin. Being a founding member of the European Communities, the European integration is one of the pillars of the Italian foreign policy, while influential intellectual currents of advocacy for the European federalism have developed both on the left - socialist and eurocommunist tradition - and the center-right – Christian-democrat tradition - of the political spectrum.

These political traditions are also the constituents of the governing Partito Democratico (PD), of which Renzi is the present secretary. The troubled relationship between the Berlusconi governments and its European partners, which resulted in the relative isolation of the country, are therefore a remarkable exception, to which the financial storm of 2011 and the downfall of the media tycoon put an end. In effect, the credit gained by Renzi on the European stage mainly rely on the work of his predecessors Mario Monti and Enrico Letta, who were able to carve a majority out of a fragmented parliament and, consequently, to undertake a program of financial consolidation and economic reforms. Acceding to the post of prime minister after urging Letta's resignations, Renzi inherited the parliamentary coalition and, basically, the macroeconomic program from his predecessors. On this basis, the former mayor of Florence grafted his message of “change”, both convincing the disaffected Italian electorate and reassuring the Eurozone leaders. The fight against tax evasion and corruption, the reduction of the costs of politics and the elimination of waste and inefficiencies of the public administrations have been framed in a narrative displaying the government reliability to Brussels and Berlin and meeting the Italian public opinion discontent against the political system. Renzi confirmed the Italian commitment to the deficit limit of 3% of the GDP and the respect of the Stability and Growth Pact (SGP) as the macroeconomic framework of the EU.

However, Renzi's bet (which was the same for the preceding cabinet too) is to employ the credibility gained in fixing the State finances for amending the rigid dispositions of the SGP and freed investments. The program of the Italian presidency set as its priorities the fight against unemployment, the European “industrial renaissance” (with a particular eye to the small and medium-size enterprises), the implementation of the “Europe 2020” growth strategy (employment, innovation, education, social inclusion and climate/energy), fostering an energy common market and security, and, in what concern the external action, a common policy on migration, the promotion of the Common European Asylum System, a European system of border guards and the reinforcement of FRONTEX to fight human trafficking. The official agenda of a semester presidency does not deviate from existing policies or innovate too much. Besides, the assignment of the objectives and the implementation of current EU policies is a joint effort of the “trio” of countries that follow one to the other in a period of eighteen months (Italy opened the trio that in 2015 will see Latvia and Luxembourg taking office).

Thus, the political ambition of the Italian presidency resides outside its official program and implies nothing less than a policy shift in the management of the Eurozone. Among the big states, Italy is arguably the most committed in providing the EU with major powers to actively redress the financial and economic imbalances among member states. This approach clashes with the Northern members’ unwillingness to share the burden of the less competitive or indebted countries and it raises fears that a stronger EU would increase its regulative powers and control, notably in powerful financial centers like the City of London. Since the Monti government, Rome has kept no secret of its support to the “eurobonds”, but the establishment of a common Eurozone sovereign debt seems to be a federalist utopia so far. Rather, a policy of growth and solidarity can be built on realistic objectives like the deduction of productive investments and R&D expenditures from the calculation of national deficits, the creation of automatic stabilizers and major powers of intervention for the European Central Bank (ECB).

A study published in October 2013 by the European Commission examined three kinds of unemployment-linked stabilizers. The first two options are respectively unconditional and conditional transfers to Member States with high and rising unemployment, the third being an EMU-wide unemployment benefit system. The Italian presidency mentions the implementation of such EMU system of support in its program. Concerning the monetary policy, the sovereign debt crisis compelled the ECB to adopt emergency measures, by injecting liquidity through open market operations. Despite the German aversion for the interventionist stance increasingly assumed by the Eurotower as the crisis unfolded, President Mario Draghi made clear that the ECB is ready to undertake any measure it deems necessary to stimulate growth. Allegedly, among the options under consideration - with consequent German denial - there is also the systematic purchase of national bonds by the ECB in order to increase the monetary base and break the deflationary spiral (quantitative easing). In other words, if national debts cannot be mutualized, the ECB would buy national debt.

Therefore, Renzi has on its side not only the states disaffected by austerity, but also the EU supranational institutions. However, it would be illusory to think that a semester will suffice in displacing the leading minimalist paradigm of crisis management, relying essentially on financial orthodoxy at the national level. Nonetheless, Renzi seems to be in the right place at the right time, with the possibility of shaping the EU agenda for the next five years. In fact, important institutional turnover took place as Italy assumed the EU presidency, even more so after an important institutional turnover having taken place with a new European Parliament elected in May and the new European Commission not in office before October. The European elections provided Renzi with a strong popular support as the PD reached an unprecedented 40% of preferences, becoming the most represented national party in Strasbourg. All these happen at a time where Euroscepticism emerges as an important - though inhomogeneous - political force.

In Paris, the setback of pro-European socialist and center-right parties crippled one of the “twin engines” of the European construction, deepening the European crisis of leadership as well as the isolation of Berlin. In this context, expectations are placed on Renzi and the Italian semester to strengthen the unity of purpose of the biggest continental economies and to mend the rift between the Nordic and Southern members of the Eurozone. Although Merkel and Renzi are “the partners that can reshape Europe”, as suggested by professor Kalypso Nicolaïdis on the Financial Times, it goes without saying that Italy cannot replace France, and the political and economic stagnation of Paris is bad news for the whole Eurozone. Furthermore, Renzi is not the first leader to rekindle hope for a definitive resolution of the European economic and institutional deadlock. The case of France and the parable of François Hollande, is again illustrative. After his arrival at the Élysée amidst big expectations, reforms capable of relaunching French economy lagged behind while unemployment rose to record high. Then, the question is whether Renzi can avoid ending up as one more irrelevant sparring partner for Angela Merkel.

Certainly, the confidence of Renzi relies not only on the number of seats gained in Strasbourg. Both the transversal pro-European camp and the European center-left found a fresh leader with an ambitious program and a compelling political narrative. His leadership and the Italian experiment of a reformed center-left has been praised throughout the European socialist camp, finding Prime minister of France Manuel Valls and the new Spanish socialist leader Pedro Sanchez among his supporters. Similarly, in the polemical interview to Le Monde that preceded his resignation, the French former minister of finance Arnaud Montebourg pointed to the path undertaken by Renzi as an example for all Europe. If nothing else, the Italian presidency has the possibility to finally provide leadership to the southern European common cause. Nonetheless, the decisive factor for a successful policy change is in Berlin. There, the German Socialist Party (SPD) with the assistance of the left wing of the Christian Democrat Party (CDU) can put all its weight as member of the German grand coalition government to bridge the differences between Merkel and her counterparts.

However, the credibility of Renzi depends entirely on the successful accomplishment of his reform program in Rome. One may question its actual extent and pace, or even the viability of the proposed legislation. Furthermore, Renzi's leadership is not without challenges, internal dissents and coalition discontents have often diluted the provisions or postponed the legislative timetable of the reform packages announced by the prime minister so far. Finally, the adopted reforms carry the risk of being either “cosmetic” or ineffective. To complicate matters, the Italian economy shrank unexpectedly by 0.2 percent in the second quarter of 2014, the country slipped in its third recession since 2008 and back in deflation for the first time since 1959. As the gross domestic product contracts, austerity measures alone would further choke consumption and investments, engulfing Italy in a debt trap. However, these data, together with the difficulties in France, are not enough to engage Merkel on pro-active policies to stimulate growth. Arguably, if there is something that can push the chancellor to make concessions to her allies, these are the signs of a slowing German economy. During the last quarter, the German economic output shrank by 0.2 per cent while business confidence declined. According to German economist Marcel Fratzscher small investments in new productive assets are the main cause of these negative figures and at the same time, uncertainty for the financial stability of the Eurozone affects the propensity to invest.

Besides, the Ukrainian crisis and the strained relations with Russia constitute another risk factor looming on the way to the economic recovery. Russia is the EU's third trading partner and the military escalation risks to seriously affect the European energy bill. Thus, the Ukrainian dossier constitutes the top priority of the Italian presidency's external action, also given the direct concerns of the Eastern EU countries. Economic sanctions and diplomacy are the tools in the hands of the EU, but their limits are evident as long as Moscow deals with the issue in hard-power terms. The fact is that the EU has not a security strategy developed as much as the economic one, and, consequently, a corresponding deterrence power. Nonetheless, although the impact of the EU in the resolution of armed conflicts is limited, the dramatic events from the Near East to Ukraine significantly affect its security, either defined in terms of direct threats, or in terms of economic stability or humanitarian emergencies.

Uncertainty along with and the winds of war in the neighborhood, further heighten concern about the recovery of the Eurozone from the vicious circle of recession, public deficits, austerity, high unemployment and consumption drop. The Italian presidency semester comes at a crucial moment and it can help in amending the minimalist paradigm that dominated the economic crisis management so far. The message of Italy is that together with fiscal consolidation and economic reforms at the national level the Eurozone needs investments and economic stabilizers. Matteo Renzi proved to be an able consensus machine, its ambitious reformist program regaining the trust of the Italian disaffected electorate and finding appreciations among the European partners.

However, leadership, a vision refreshing the appeal of the European project, good intentions and a convincing discourse, cannot solve by themselves the structural problems of the Eurozone. The alliance between Paris and Rome and the financial firewalls offered by the ECB would be fruitless without the accomplishment of internal reforms and, above all, without the full commitment of Berlin in policies of growth at the European level. Finally, under the Italian presidency the three big founding members are called to display solidarity and mutual trust, the values standing at the roots of the European political project.

Raffaele Borreca is a PhD Candidate in Contemporary History at the Department of Political Science & International Relations of the University of Peloponnese.

© Inter Alia 2013