What Italy’s Election Means for the EU
The EU – and the eurozone, in particular – are now facing a serious political challenge, exemplified by the outcome of Italy’s recent election. Are European institutions strong enough to confront that challenge, or must EU leaders rethink – and potentially recast – the pillars of cooperation?
ROME – Italy’s recent election – in which voters rebuffed traditional parties in favor of anti-establishment and far-right movements, producing a hung parliament – should serve as a wake-up call for Europe. The decades-old project of building European unity may not just be far less robust than assumed; without a significant rethink, it may not even be viable.
The financial crisis of 2008 and the debt crisis that followed revealed major flaws in the governance of the Economic and Monetary Union (EMU). Member states responded by building new institutions, such as the Single Supervisory Mechanism and the European Stability Mechanism. These efforts are, however, almost certainly inadequate to make the EMU resilient enough to withstand future financial crises. Anyone who believes in the European project should hope that further reforms follow soon.
But there is an even more urgent task at hand. The European Union (EU) and the EMU, in particular, are now facing a serious political challenge, exemplified by Italy’s recent election. Are European institutions strong enough to confront that challenge, or must we reconsider – and potentially recast – the pillars of European cooperation?
The link between economic and political crises is well known. Among EU countries, Italy has experienced the second-largest decline in output (after Greece) during the last decade – a trend that caused a significant deterioration in economic welfare. And, as recent research indicates, a decline in welfare correlates more strongly with political support for populists than its absolute level.
In this sense, economic crises are almost bound to undermine political stability. But the risk is particularly acute in the EU, because populist political forces, should they win power, are likely to reject, in the name of national sovereignty, the supranational rules that form the basis of European institutions.
In the face of such noncompliance, the EU’s only recourse is sanctions – a temporary solution that is inadequate to keep in check governments that have based their political platforms on disavowing common EU rules. In fact, such sanctions can even serve to strengthen public support for the populists. This dynamic is illustrated by the current row over immigration between the EU and some of its eastern members, such as Hungary and Poland.
Of course, if the rules being broken are fiscal, the markets might impose the necessary discipline, as happened in 2011-2012. But today, the ongoing economic recovery – and the fact that governments and central banks hold the majority of countries’ debts – makes such a market response far from guaranteed.
Complicating matters further for the EU are regional disparities, like those starkly on display in Italy’s recent election. While anti-establishment political parties did well across Italy, reflecting broad frustration with the mainstream parties, there was also a distinct north/south divide.
Italy’s industrial north favored the far-right League party, which favors tax cuts and opposes immigration. By contrast, Italy’s economically deprived southern regions – where youth unemployment has, in some areas, reached nearly 60% – voted overwhelmingly for the Five Star Movement, which advocates a guaranteed basic income and condemns the corruption of local elites.
Regional inequalities are not limited to Italy. On the contrary, they have increased throughout the EU since the 1980s. And the EU does have a budget for reducing them, which it uses to support its cohesion policies. But while measures encouraging economic convergence have been successful in many jurisdictions, they have failed in others, such as southern Italy, precisely because of the institutional weakness and widespread corruption that the populists decry.
As anyone with experience in development policy knows, fiscal transfers cannot generate convergence growth, unless they are backed by deep societal changes – and that demands active local leadership. It is thus significant that Italian voters threw their support behind those who decried the abuse of power by local elites and traditional parties, instead of believing that those local elites, let alone the faraway EU, can fix the problem.
This might seem to imply that the EU needs to be able to impose looser terms of cooperation, including fewer benefits from membership. But while that might work for, say, Hungary, it would be inconceivable for an EMU member like Italy. In any case, if the EU is to survive long enough to implement the needed institutional reforms, it will to have to find ways to make the project more appealing for all.
Populists of the World Unite
Former White House Chief Strategist Stephen Bannon's starring role at the recent convention of France's far-right National Front is the latest indication that a transatlantic populist alliance is forming. Can it be stopped?
PARIS – In 1965, Henry Kissinger wrote a book called The Troubled Partnership, in which he examined the tensions affecting the transatlantic alliance during the Cold War. A stable international order, he argued, demanded the leadership of the United States – a powerful model for democracy in the world – supported by strong ties with Europe. Kissinger probably never would have imagined that, less than six decades later, the US would be playing precisely the opposite role, as a new, darker version of the transatlantic alliance emerges.
Consider last week’s convention of France’s far-right National Front. Upon being re-elected leader of the party, Marine Le Pen announced that it was to be renamed Rassemblement National (National Rally). The guest of honor at this consequential event was none other than Donald Trump’s former chief strategist, Stephen Bannon.
“All great world-historic facts and personages appear, so to speak, twice,” Karl Marx famously wrote, “the first time as tragedy, second as farce.” It would be easy to place the convention in Lille in the “farce” category. After all, Le Pen and Bannon are both political rejects.
Le Pen lost last year’s French presidential election to Emmanuel Macron in a landslide. Moreover, she is now being challenged within her own party by her much younger and more intellectually impressive niece, Marion Maréchal-Le Pen, who spoke just ahead of US Vice President Mike Pence at February’s Conservative Political Action Committee (CPAC) gathering in Washington, DC.
As for Bannon, he was fired unceremoniously by Trump in August 2017. To add insult to injury, Trump released a statement declaring that Bannon “had very little to do” with Trump’s victory in the presidential election, and had lost not just his job, but also “his mind” when fired.
Bannon’s presence at the Lille event was paradoxical. After all, his firing was rooted partly in his extremism, while Le Pen is currently attempting to widen her party’s support by softening its image. Yet, in another sense, his participation made perfect sense, as it reflected the ongoing development of a transatlantic populist alliance, a bleak variation on the “geography of values” upon which the Cold War alliance was based.
Despite Bannon’s own political setbacks, he maintains that the “tide of history” is irresistibly moving toward the populists. From his perspective, with Trump having secured the US presidency – a development that has destabilized the world order that Bannon and his ilk so badly want to burn down – it is only a matter of time before Europe follows in America’s footsteps.
It would be dangerous to dismiss Bannon’s vision as mere bluster. Macron may have won the day in France, but Trump’s electoral victory was no accident. Nor was the strong showing by populist parties in this month’s election in Italy, where the anti-immigration League party and the anti-establishment Five Star Movement together secured some 50% of the vote.
Even Germany has, to some extent, fallen victim to populist forces. To be sure, a new grand coalition government – comprising Chancellor Angela Merkel’s Christian Democratic Union, its Bavarian sister party, the Christian Social Union, and the Social Democratic Party – has been formed. But it took more than five months for the parties to agree, and the largest opposition party is now the far-right Alternative for Germany. In a country that seemed to have been vaccinated against populism by its Nazi history, this is a particularly distressing development. Democracy is more fragile than it may seem, and it can never be taken for granted.
So how can we stem the populist tide? For starters, political elites on both sides of the Atlantic who still believe in liberal democracy must recognize that it is they who are responsible for populism’s rise, owing to their failure to respond adequately to the concerns of the electorate. They must work tirelessly to find real solutions to the problems, from inequality to migration, that have fueled support for populist forces. Those solutions must address not only technical challenges, but also citizens’ feelings – skillfully tapped by populists – of disenfranchisement and loss of identity.
Of course, US Democrats must also find a compelling candidate to run against Trump in the 2020 presidential election. And France and Germany must push forward with further European integration. Here, France has a special responsibility, under Macron’s leadership.
And, make no mistake: Contrary to what Bannon said in Lille, it is Macron – not Le Pen and her rebranded party – who holds the key to the future of democracy in France. If he fails to make the system work for more of the electorate, France could well go the way of the US, setting a dangerous precedent for the rest of Europe. In such a scenario, the transatlantic alliance really would be in deep trouble – and so would the world order that it underpins.
Centrifugal and Centripetal Forces on Economic Areas
The flurry of secessionist around the world today raises important questions about optimal political and economic arrangements. But if there is any clear takeaway, it is that "optimal" is a moving target: good governance entails adaptability to constantly changing circumstances and accommodation of diversity.
STANFORD – Several years ago, I predicted that there would be a tectonic shift toward devolution, secession, and independence around the world, owing to the failure of political institutions to manage economic, cultural, ethnic, and religious differences.
Supranational economic and political institutions were clearly generating a backlash, as they concentrated more power in central governments. Citizens in many countries started to feel as though their sovereignty had been eroded. And they worried that the costs of increasing immigration were too high, given the slow recovery from the Great Recession, weak productivity growth, and labor’s declining share of income.
Since then, the United Kingdom has decided to withdraw from the European Union. “Divorce” discussions are now underway to determine how much the British will pay the EU, and what future trade relations will look like. The process has not been easy, because EU negotiators are worried that if the exit terms are too generous, other member states might follow the UK out of the bloc.
Meanwhile, the United States, under President Donald Trump, has withdrawn from the Trans-Pacific Partnership and abandoned the Transatlantic Trade and Investment Partnership with the EU. Now it is threatening to withdraw from the North American Free Trade Agreement unless Mexico and Canada make concessions.
In Spain, on October 1, the government of the semi-autonomous region of Catalonia held a referendum in which an estimated 43% of Catalans took part, voting overwhelmingly for independence. After the Catalan parliament declared independence, the Spanish national government invoked a constitutional provision to take administrative control of the region, escalating the crisis.
Not to be outdone, more than 90% of those who participated in recent referenda in Lombardy and Veneto, Italy’s two richest regions, voted for more control over local education spending and taxes. Italy’s massive public debt and subsidies to poorer regions were certainly on these voters’ minds. But Giuseppe Garibaldi, the general who united Italy’s city-states in the nineteenth century, must be turning over in his grave.
Elsewhere, Iraq’s Kurdistan Regional Government, having held an independence referendum in late September, is now trying to negotiate with the central government in Baghdad, which has sent troops to reclaim the region’s oil fields. And Chinese President Xi Jinping used this month’s 19th National Congress of the Communist Party of China to consolidate his position further, by shifting more power from the provinces to the central government in Beijing.
Even in countries long known for stability, there is a clear tension between centralized and decentralized political authority. For example, a group called Calexit is trying to introduce a California ballot proposition to secede from the US. According to early polls, one-third of Californians would support such an initiative. And early this month, California Governor Jerry Brown signed a bill declaring California a “sanctuary state” – a mostly symbolic gesture indicating that the state will not fully cooperate with the Trump administration’s efforts to enforce federal immigration law.
At the national level, congressional Republicans’ ill-fated attempt to repeal and replace the 2010 Affordable Care Act (Obamacare) sought to shift more responsibility to the states through federal block grants. And yet, the Republican tax-reform proposal that is now being discussed would eliminate a federal tax deduction for state and local taxes that other states consider a subsidy for high-tax states like California and New York. (Netting all the fiscal interactions and transfers, the reverse is closer to the truth.)
In Europe, the EU has continued to kick the can down the road, rather than deal with its crises in sovereign debt, banking, growth, and unemployment. EU leaders are hoping that a modest cyclical upturn will buy them time. But, at the end of the day, they will still have to confront a core problem: Germany, which has benefited the most from a monetary union in which its trading partners have no currency to depreciate, doesn’t want to foot the bill for bailing out profligate member states.
It may come as no surprise that a recent Pew Research Center poll found that 70% of Europeans, Canadians, and Americans favor more direct democracy, “in which citizens, rather than elected officials, vote on major issues.” This would horrify America’s founders, who regarded direct democracy as a precursor to mob rule, and established a system of checks and balances precisely to prevent such an outcome.
Each of the aforementioned examples of centralization and devolution is unique. But it is worth asking if there are also commonalities among them.
When the Nobel laureate economist Robert Mundell, the intellectual “father of the euro,” set out to determine an optimal currency area, he put a premium on natural trade and macroeconomic ties. As a Canadian, he was struck by the “horizontal” nature of the Canadian and American currency areas. To his mind, “vertical” areas comprising the Canadian and American west might make more economic sense.
Mundell’s insight can be applied much more broadly. Economic areas are continually forming, combining, and dissolving as a result of competing centrifugal and centripetal forces. Constant shifts in comparative advantages, economies of scale, and transaction costs affect the benefits of accommodating more homogeneous localized preferences.
Likewise, “optimal” political areas change over time, owing to changes in technology and demography, and their interaction with evolving cultural, ethnic, religious, and other factors. These processes of coming together and falling apart can be beneficial or harmful. The EU has certainly been a great success as a trade area, but less so as an integrated labor market and currency union; and it has altogether failed as a banking and fiscal area.
Or consider the Indian subcontinent, where distrustful neighbors armed with nuclear warheads pose a danger to themselves and the world. Given that India still has almost as many Muslims as Pakistan, it is possible that religious tensions could have been mitigated within the confines of a single country. By my estimate, Pakistan and India’s current volume of trade should be 25 times higher than it is. That would greatly benefit both countries, not least because they would each have a greater stake in the other’s success.
Governing well in a context of economic, political, ethnic, and religious diversity is not easy. But failure to do so can mean substantially less growth – and substantially more political risk.
Europe’s Crisis Starts at Home
According to conventional wisdom, the biggest threat to the European project is "illiberal" saboteurs on the periphery of the European Union who have decided not to play by the rules. But what this narrative misses is the even deeper divide within EU member states, including bastions of liberalism such as France and Germany.
LONDON – Deep divisions within Europe are increasingly threatening the values upon which the European project of “ever closer union” is based. In 2015, during the refugee crisis, many commentators saw a divide between German Chancellor Angela Merkel’s Willkommenskultur (welcoming culture) and Hungarian Prime Minister Victor Orbán’s vision of ethnic purity: a Western Europe of bridges versus an Eastern Europe of walls.
But another threat to European unity comes from within individual countries. In Germany, talks to form a center-left, center-right coalition have broken down. In the Netherlands, it took Prime Minister Mark Rutte 208 days to form a new government after elections in March. In the United Kingdom, the political establishment is in disarray over Brexit. And in Poland, white nationalists and neo-Nazis recently staged a massive march through the streets of Warsaw.
Which gulfs are wider – those between member states or those within them? The answer to that question matters a great deal. If Europe’s biggest problem is that it is divided along national borders, then liberal-leaning countries like France and Germany could try to change the balance of power within increasingly illiberal countries.
Every EU country agreed to a set of liberal-democratic standards (part of the so-called Copenhagen Criteria) when it joined the club. But, over time, the governments of Hungary and Poland have decided that they no longer want to abide by the rules. One solution could be to create a smaller club with better benefits. Countries that wish to join this privileged inner circle would have to agree to a new – or rather, the original – set of rules; and countries that break the rules would be left out. There would finally be a cost to breaching EU standards.
But this solution could work only if the biggest problem is the divide between member states. As for the divisions within member states, consider Germany. After the federal election in September, Merkel embarked on a fascinating experiment, in which she tried to unite her center-right Christian Democratic Union (CDU), its more nativist sister party, the Christian Social Union (CSU), the pro-business Free Democrats (FDP), and the left-wing Greens.
Merkel is a talented negotiator, and far better suited to write about “the art of the deal” than others we won’t bother mentioning. But it remains to be seen if she can heal the divisions in her own country.
While the Greens would like to uphold the Willkommenskultur, the CSU’s position on migration is closer to that of the Visegrád Group (the Czech Republic, Hungary, Poland, and Slovakia). In fact, at the height of the refugee crisis in 2015, the CSU hosted Orbán at one of its party conferences.
Moreover, while the Greens are European federalists who support greater economic solidarity with Greece and Italy, the FDP channels the fiscal discipline of the Finns, the Dutch, and German Swabians. They are staunchly opposed to deeper European economic integration.
Many hoped that Merkel would succeed in forging a “Jamaica” coalition (named after the colors of that country’s flag). But, in the end, the experiment failed. The FDP abandoned the talks out of frustration that, as its leader Christian Lindner put it, “The four discussion partners have no common vision for modernization of the country or common basis of trust.”
Even without a Jamaica coalition, Germany still has a stable liberal majority in the Bundestag. The same cannot be said for the rest of the EU, where almost every other member state is now a “50-50 society”: half cosmopolitan, half communitarian. In these countries, the government at any given time represents whichever side won the latest round in an ongoing culture war.
In the UK, for example, 52% of voters opted to leave the EU. The country is now hurtling toward an isolated state of provincialism and xenophobia, but its leaders keep telling the public that Britain will be better off on its own. For those who believe it, the fact that the UK will lose a say in EU decisions affecting its economic environment doesn’t seem to matter.
France, on the other hand, has an energetic new pro-European president, Emmanuel Macron, who is committed to preparing his country for the years ahead. And yet France is not much more cosmopolitan than Britain. In the first round of the presidential election this spring, the nativist campaigns of Marine Le Pen, Jean-Luc Mélenchon, and Nicolas Dupont-Aignan collectively won 46% of the vote – almost as much as the UK’s “Leave” campaign.
Clearly, the EU is both a society of states and of citizens. That means intra-national divides are as important as the diplomatic spats between countries.
Earlier this year, a Brookings Institution report tried to determine if Europe is an “optimal political area,” a concept borrowed from economist Robert Mundell’s theory of “optimal currency areas.” The report concluded that cultural and institutional differences between EU countries have not changed much over the past three decades of European integration. But it also found that the divisions between countries are far smaller than the differences within countries. Or in other words, on the issue of freedom of movement, there is greater polarization between London and the British Midlands than between the UK and Poland.
Creating a flexible or multi-tiered Europe could solve some short-term problems, by bringing together coalitions of the willing to address specific issues. But it could also introduce new dangers. After all, most European countries, regardless of what tier they are on, will still be 50-50 societies that could opt in or out of deeper integration with a single election or referendum. In the future, one cannot rule out the possibility that Le Pen will be elected president of France, or that the anti-EU Five Star Movement will come to power in Italy. By the same token, the more moderate Civic Platform might return to power in Poland.
Confronting the intra-societal challenge to the European project will not be easy. It is a deep, generational problem that goes to the heart of national identity, history, and geography. No quick institutional fix can solve a problem like that.