It has been less than two months since the populist Five Star Movement (M5S) and the right-wing League party formed a new Italian government, so it is too early to tell how the coalition will translate its campaign rhetoric into concrete policies.

Italy’s Turn Against Europe

It has been less than two months since the populist Five Star Movement (M5S) and the right-wing League party formed a new Italian government, so it is too early to tell how the coalition will translate its campaign rhetoric into concrete policies.

In fact, the coalition’s internal contradictions might limit the scope of its legislative action, or even bring about its downfall – possibly even before the European Parliament elections in May 2019.

That said, it is not too early to see what the Italian government’s anti-European posture will mean for Europe.

For European Union leaders watching from Brussels, the political dynamic that the M5S/League coalition has set in motion could prove far more consequential than any specific policy initiatives.

The M5S/League coalition is the first instance of an overtly anti-EU government coming to power in one of the bloc’s founding member states.

Although its radicalism is partly a response to the Italian economy’s dismal performance over the past two decades, a similar brand of anti-establishment politics has taken root in European countries that have fared better. Far from being an outlier, Italy could be a harbinger of what awaits many other countries, especially after the EU elections.

Italy’s new government has wasted no time taking a hard line on immigration. Matteo Salvini, the League leader and current interior minister, has castigated the EU for leaving Italy on its own to deal with incoming asylum seekers.

Salvini’s rhetoric is often racist and inflammatory, but he has a point when he argues that the refugee crisis demands a collective solution. The EU’s highly visible failure on this issue has played directly into its critics’ hands.

So far, Italy’s challenge to the EU over immigration has forced “core” member states such as Germany to begin considering negotiated solutions to the problem. But a truly viable cooperative approach still seems a long way off.

That means governments that sympathize with Salvini’s position will most likely continue to pursue unilateral policies, possibly jeopardizing the Schengen system of passport-free travel within most of the EU.

Destroying this foundational EU institution might not be Salvini’s stated goal, but he is clearly taking things in that direction.

Meanwhile, on the economic-policy front, the new Italian government has introduced its “decreto dignita” (“law for dignity”), which will reverse some of the labor-market reforms enacted by former Prime Minister Matteo Renzi’s center-left government.

Specifically, the legislation will make it more difficult for firms to fire permanent-contract workers, or to employ workers on temporary contracts over the long term.

A technical analysis conducted by the state National Insurance Agency predicts that the new law will lead to an overall decrease in employment, and that this will negatively affect the national budget. In response to these findings, the government has threatened to fire the NIA’s president.

The M5S/League government’s attack on the independence of the civil service offers a taste of what is to come.

A broader conflict within the coalition is already playing out over how to reconcile left- and right-wing economic-policy agendas within the constraints of EU fiscal rules – which the current finance minister, Giovanni Tria, says he wants to uphold. This conflict could come to a head if the coalition moves forward with its proposals for a guaranteed-income scheme, pension reforms, and tax cuts.

Although the government’s immediate objectives center on domestic matters, its policies could have profound implications for the EU generally.

As we have already seen in the case of refugee policy, the government will most likely adopt a confrontational position toward the EU whenever it can.

After all, challenging the EU plays well with both the M5S and League electoral bases, and other governments – not least those of Hungary and Poland – have already demonstrated the effectiveness of scapegoating Brussels for domestic failures.

But what is the end game? On the one hand, the Italian government’s aggressive attitude could be interpreted as a negotiating tactic vis-à-vis the EU; on the other, it could be a political strategy for the upcoming EU elections.

Like resurgent nationalist parties in other member states, the M5S/League may be trying to push the EU toward a looser federation in which key policy prerogatives are transferred back to national governments.

But for eurozone countries, this outcome would lead to more instability. In the absence of aligned budgetary policies and common rules, a common currency is simply not sustainable. Though M5S and League leaders are not calling for a withdrawal from the eurozone, much less the EU, their ostensibly domestic agenda is bound to damage the bloc’s foundations.

The EU must brace itself. We are about to see the damage that can be done when a major member state pursues a program of EU antagonism. Italy is showing that without progress toward “ever closer union,” a quiet disintegration could be in the offing.

Lucrezia Reichlin, a former director of research at the European Central Bank, is Professor of Economics at the London Business School.

 Copyright: Project Syndicate, 2018.