Italy issues a euro dare to Germany... again

THERE Italy goes, threatening to blow up the euro again. The uproar over the budget proposal put forward by the new left-right insurgent government has reignited fears that the eurozone’s third-largest economy is on the path to fiscal ruin and will drag the rest of the currency bloc down with it. It could happen, although not in the way or for the reason you may think.

The numbers look bad. The coalition of the right-wing League and sort-of-left-wing 5 Star Movement is proposing to overspend revenues by 2.4% of gross domestic product for the next few years—and that’s if GDP growth meets their rosy assumptions. This is a crisis, we’re led to believe, compared with the 1.6% of GDP deficit Brussels might otherwise have accepted from technocratic Economy Minister Giovanni Tria.

If a 0.8-point difference in budget projections sounds to you like a flimsy reed on which to hang a currency crisis, you’re not alone. The strongest case for the degree of upset this budget is causing is that it’s clear Rome’s new leaders have no plan for paying down a national debt equal to 130% of GDP. Italy is probably too big to be saved by other eurozone countries – and were it to renege on its debts, it could well bring down a smattering of French and German banks with it.

But Rome didn’t have a viable plan to reduce its debt before the latest election, either. So one suspects markets have reacted badly to this brouhaha—the spread between Italian government bond yields and supersafe German bunds is reaching levels not seen since 2013, in the aftermath of the eurozone crisis— not because of the numbers, but because of the politics.

The specific fear is that as Rome extends its political battle against Brussels over budgetary sovereignty, the fight could lead to a broader resurgence of euroskepticism in Italy. A smattering of Italian academics have challenged Italy’s membership in the euro. There’s never been a plausible case for subjecting an economy like Italy’s to monetary policies and fiscal rules suitable for an economy like Germany’s or vice versa. Now no one can say what will happen if Italian voters themselves are asked about it.

Then again, one can make an educated guess that Italians would vote to stay. Modern euroskepticism speaks to emotive issues such as control of one’s own homeland, a restoration of democratic authority at the national level, and a defense of local values against an aloof and frankly ridiculous left-wing consensus in Brussels. Still, economics always finds a way to intrude.

That’s why Greece is still in the euro despite a referendum result to the contrary in 2015, and why Ireland, Spain and Portugal tolerated punishing policy conditions on their own bailouts. All realized it makes little sense for debtors to leave a club that always steps in to pay their debts in the end.

Trendy economists argue that the cost of that aid in brutal policy conditions is too high. But voters have their own keen understanding of the costs of the currency devaluations and fiscal blowouts the economists propose instead. As bad as things get, those voters trust the European Union more than their own wretched governments to manage an economy.

So as Rome’s budget melodrama unfolds, the concern shouldn’t be that Italy will choose to jump out of the euro. Worry instead that it will be pushed.

The real mystery of the eurozone is why the creditors stay. The largest is Germany, and the motive to date has been a steely political determination by Chancellor Angela Merkel to preserve the common currency as a talisman of European unity. So too for the German taxpayers who foot the bill, for whom membership in the EU—and the euro—assumes an almost spiritual significance.

Times are changing, however. Germany’s inexorable electoral calendar is about to deliver another rebuke to Mrs. Merkel’s centerright coalition in state elections in Bavaria, raising fresh questions about the how long she’ll last.

One of the alternatives to which voters are turning is the hyper-European Greens, but the other is the profoundly euroskeptic Alternative for Germany. The rise of the latter emboldens those within Mrs. Merkel’s party who might prefer to call time on bailing out one eurozone laggard after another.

Italy’s dual and dueling leaders, Matteo Salvini and Luigi Di Maio, believe Mrs. Merkel still will ultimately be more accommodating than previous Italian governments have assumed. That’s why they aren’t even pretending to abide by EU fiscal rules at the moment. Their miscalculation, if this proves to be one, won’t be muffing their budget math. It will be failing to perceive a political shift in the eurozone’s biggest benefactor.