Schäuble’s Gathering Storm

ATHENS – Europe’s crisis is poised to enter its most dangerous phase. After forcing Greece to accept another “extend-and-pretend” bailout agreement, fresh battle lines are being drawn. And, with the refugee influx exposing the damage caused by divergent economic prospects and sky-high youth unemployment in Europe’s periphery, the ramifications are ominous, as recent statements by three European politicians – Italian Prime Minister Matteo Renzi, French Economy Minister Emmanuel Macron, and German Finance Minister Wolfgang Schäuble – have made clear.

Renzi has come close to demolishing, at least rhetorically, the fiscal rules that Germany has defended for so long. In a remarkable act of defiance, he threatened that if the European Commission rejected Italy’s national budget, he would re-submit it without change.

This was not the first time Renzi had alienated Germany’s leaders. And it was no accident that his statement followed a months-long effort by his own finance minister, Pier Carlo Padoan, to demonstrate Italy’s commitment to the eurozone’s German-backed “rules.” Renzi understands that adherence to German-inspired parsimony is leading Italy’s economy and public finances into deeper stagnation, accompanied by further deterioration of the debt-to-GDP ratio. A consummate politician, Renzi knows that this is a short path to electoral disaster.