Italy at crossroad

The following editorial appears on Bloomberg Opinion.

Italy’s new populist leaders appear to be sticking to the program that brought them to power: In their budget plans, they’re charting a course that could ultimately put the entire European project at risk. One can only hope that they will see reason.

Since forming a government last spring, the coalition of the anti-establishment Five Star Movement and right-wing League has kept everyone guessing about its genuine intentions. Its leaders made expensive promises to Italians, including big tax cuts, a lower retirement age, and even a basic income. They also vowed to pass a prudent budget that wouldn’t run afoul of EU rules on government deficits and debt. These aims are not compatible.

Now comes a moment of truth, as the coalition sets out its budget for 2019. It’s not looking good. After much deliberation, the government is aiming for a deficit of 2.4 percent of gross domestic product, up from a projected target of 0.8 percent under the previous administration. Although that stays within the EU’s 3 percent limit, it violates the further requirement that highly indebted nations make a genuine effort to shrink their burden, which in Italy’s case would require a deficit significantly smaller than 2 percent.

Minor as the difference might seem, it could have big consequences for Europe. Italy’s debt burden, at about 130 percent of GDP, is already the euro area’s highest after Greece. If investors lose faith that the government can get it under control, Europe’s leaders could find themselves facing the awful options of trying to rescue Italy, overseeing an unprecedented debt restructuring, or allowing the euro’s third-largest economy to exit. All would endanger the common currency that is at the heart of Europe’s efforts to maintain a lasting union.

Harsh reality could yet force Italy toward the path of prudence. These days, it’s not uncommon for populists to do a decent job of managing government finances. Portugal, for example, has performed perfectly well under its nominally left-wing coalition.

If Italy pulls back from the brink, Europe’s leaders should be accommodative. They should recognize the extent to which they have aggravated Italy’s predicament by leaving the country to bear the brunt of the region’s refugee crisis.

For now, though, it’s up to Italy’s leaders to demonstrate some responsibility.