Is Italy poised to blow up the euro?

A brewing confrontation between the country’s populist Government and the EU could do long-term damage

Stop me if you’ve heard this before: a populist Government comes to power promising to do things it can’t do if it wants to stay in the euro zone that it says it doesn’t want to leave.

That is what happened in Greece in 2015 and, as proof the euro crisis never really ends but just takes a break, that is what is happening in Italy now. The question is whether this brewing confrontation will turn out differently, or whether Europe’s threat of financial ruin will be enough to coerce Italy’s radicals into becoming the executors of policies they despise, as Greece’s radicals did.

So far, the basic outline has been the same. Italy, like Greece, has cycled through centre-left and centre-right Governments that haven’t been able to get their economy moving while adhering to the strictures of euro zone policy. Italy’s economy has not only done worse in per capita terms than Greece’s since the euro was introduced in 1999, but is also smaller than it was then. The reasons might be somewhat mysterious — the country’s sclerotic small businesses and the red tape that keeps them from getting bigger might have a lot to do with it.

And so Italy, like Greece, has turned to anti-establishment parties in its desperation. In this case, those are the ideologically protest party known as the Five Star Movement, founded by a comedian a little less than a decade ago. It commands the support of the country’s southern and poorer half, and the far-right party the League, which has reinvented itself from being the champion of northern secession to being viciously antiimmigrant. Together, they control a majority of seats in parliament, and form the populist front that neither Berlin nor Paris wanted to see.

That’s because, even though they now say they don’t want to get rid of the euro, their demands would still mean the end of it as we know it. In particular, they want to be allowed to run bigger deficits so they can push through the basic income for poor families the Five Star Movement

Like most games of chicken, this is one that’s best not played

campaigned on, and the mostly flat tax the League back. Creditor countries like Germany are worried this will end with having to bail out the Italians, or with the European Central Bank buying so much more of their debt it finally makes inflation wake up from its slumber.

It sets up an unbalanced game of chicken. On the one hand, Italy is at Europe’s mercy, because it depends on the ECB to keep its banks afloat and borrowing costs down. Which is to say that if it ever did something it’s not “supposed” to, like deliberately running a bigger deficit, then the ECB could crash its economy by pulling the plug on its financial system as it did in Greece. On the other hand, doing that would potentially put Europe at Italy’s mercy, because at that point it would have little to lose by leaving the euro. Maybe most important, though, is it would be a bigger threat than when Greece tried it because Italy’s economy is so much larger. Europe was confident that it could contain any fallout from a Greek exit but it’s doubtful it could with an Italian one.

Italy’s populist parties probably don’t want to be seen as pushing things that far but they would be more than happy to do so if it looked like Europe was doing the pushing. Like most games of chicken, this is one that’s best not played.

It was one thing with Greece, since Europe could tell itself that it never should have been allowed in the euro zone in the first place. But what about this time? The euro zone is actually recovering and yet its third-largest economy is rebelling against a system that doesn’t seem to work for it. The euro crisis might have started out as a financial crisis that begot an economic crisis, but in parts of Europe, it’s still an economic crisis that’s begetting a political crisis which could cause another financial crisis. And it’s only going to get worse whenever the next recession hits.

If the euro keeps giving the continent’s populists so many chances, they will kill it. It’ll be deja vu — just don’t ask me which language it will come in next.