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BRUSSELS – A few years ago, the European Union faced a populist Greek government whose debts threatened the single currency, the euro and the very integrity of the bloc.
But if the European Union thought the problem was behind it, it is back – and bigger and more dangerous than ever – in Italy, whose populist government also insists on breaking the bloc's rules on fiscal discipline in order to keep the confidence of his constituents.
The European Union rejected Italy's draft budget 2019 this week and demanded revisions; Italian leaders, like the Greeks before them, say that they will ignore these demands.
This conflict between an elected government that has increased public spending and technocrats in Brussels sums up the dilemma within the European Union – its democratic deficit as it tries to manage a currency shared by sovereign states without common budget or Minister of Finance.
However, current fears about the budget raise a much deeper fear in the European Union: it will give more strength to a populist eurosceptic wave across the continent before the elections of a new European Parliament in May.
Until now, European populism has played on national stages. However, a major populist demonstration in the European elections would radically alter the balance of power in the European Parliament, affecting the composition of the European Commission – the bloc's executive body – and potentially making the institutions of the European Parliament more competitive. European Union even more inefficient.
This broader political concern is part of the real debate on how to manage Italy and its provocative budget, European officials said.
While Italian Deputy Prime Minister Matteo Salvini, a right-wing populist of the League, uses the problem of migration to draw attention to Brussels and increase its popularity, its partner and rival, his team mate and rival, Luigi Di Maio, a left-wing populist of the Five Star Movement, is expected to use the budget-driven clash to improve his position at home.
If the divisions within the Greek and Portuguese governments minimize their difficulties in Brussels, "the divisions within the Italian coalition reinforce the need to stick to Brussels and remain firm both in terms of fiscal policy and in migration, "said Mujtaba Rahman, chief European analyst. for the Eurasia group, a consulting company.
Mr. Salvini is committed to reducing taxes, while Mr. Di Maio has promised a guaranteed income to the unemployed and the poor. Both want to keep their promises.
The fear in Brussels is that if the technocrats are too harsh towards the Italians, they could mobilize the support of Mr Salvini and other European populists and create institutional challenges for the bloc at least for the next five years.
"Greece is no longer the only European country to count crazy politicians," said Maria Demertzis, deputy director of Bruegel, an economic research institution in Brussels.
"The current Italian government has its own dose of absurdity," she said. "But he is still elected, they have signed agreements with Brussels and should honor them, but elected governments also have the opportunity to change their minds, and there is no right answer to punish a country."
The European Union has imposed its will on small Greece, which was in a desperate situation, said Mrs Demertzis. "The way 27 nations have imposed themselves on a sovereign nation is still something we have not understood. It is here that the USU. tries to reconcile a circle and the democratic deficit comes into play. "
The result is that "Greece is no longer a sovereign country, but exists in a debtor-creditor relationship with Brussels," said Ms. Demertzis. "It creates a lot of resentment and anger."
Bruno Maçães, former Secretary of State for European Affairs in Portugal, sees the contradiction. In a Twitter message, he writes: "I look at what is happening in Italy and I can only think: what folly allows people to think that a fiscal union will lead to something other than the end of the EU? Imagine what would happen if Brussels had the power to draft or definitely veto the national budget? "
Of course, Italy is not Greece and it has much more room for maneuver. Italy is still able to finance itself and the markets – which had forced Greece and Portugal to give in – are ambivalent, because it is more of a political crisis than an economic crisis.
A serious debt crisis in Italy is only hypothetical if it is more plausible than before. But given the size of Italy and its status as a central bloc country, a crisis, if it were to happen, could be unmanageable and have consequences not only for the European economy, but also for the world.
Italy is the third largest economy in the eurozone and has a cumulative debt of about $ 2.6 trillion – among the five largest debts in the world and accounting for nearly 132% of gross domestic product, more than double the maximum of 60% allowed by European regulations
The debt is so important that even if about 70% of it is held in the domestic market, German, French and American banks are highly exposed. But a crisis would primarily affect Italians, including small business leaders who voted for this government. It is therefore unlikely that Rome wants to jump over the cliff.
Nevertheless, if investors were really frightened and the cost of Italian borrowing increased, Italian debt payments could become uncontrollable. The bailout of Greece cost about $ 300 billion. Greece is tiny compared to Italy, whose economy is nearly 10 times larger.
In addition, the structures that the European Union has put in place to deal with debt crises, such as the European stability mechanism, are small and would force Italy to accept a restructuring plan, which this government would have very little chance to accept.
Then the European Central Bank should decide whether Italy is really too big to go bankrupt, especially if the stakes include the very existence of the euro currency. "Would European countries really be ready to break the euro?" Asked Mrs Demertzis de Bruegel.
So, the nightmare is over there, far away on the horizon. And that, of course, is another element of the balance sought by Brussels, officials pointing out that they are open to dialogue with Italy on its budget, and some economists suggest that, given the essentially stagnant growth in Italy – less than 1% per year – a tax expansion could be beneficial. Yet, in the long run, the message is clear: what Italy is doing is incompatible with joining the euro and the single market.
Italy has three weeks to respond to the European Commission, but it will probably not vote a budget before the end of the year. The commission could then impose on Italy a procedure called "excessive deficit procedure", which could eventually lead to fines and penalties.
But all of this will take time – and the May elections are not that far away.
"It's all about timing," said Rahman. "But it's also a question of democracy and membership. And this is the issue that most worries policymakers in France, Germany and Brussels. "
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