Italy and the Completion of the Euro Area

Summary:

Italian perceptions of the recent economic and financial crisis tend to focus on the role of banks and financial markets rather than competitiveness or public finances. As a result, Italians stress the importance of reforming euro area institutions to stabilize cross-border capital flows. This emphasis runs alongside a more general ambivalence that Italians feel toward the role of European institutions in structuring macroeconomic policy coordination and imposing fiscal discipline. There was a time when Italians believed that they need ‘Europe’ to act as an external constraint in order to shore up domestic policymaking; that time is now past. Hence Italians are unlikely to support reforms that emphasize strict conditionality in the provision of emergency lending or that focus on new ways to impose fiscal discipline on member state governments using European institutions. They are also unlikely to support any measure to reduce risks across the Italian financial system that they view as counter-productive.

How strongly Italians will express these preferences remains to be seen. The country will head to elections on 4 March 2018 and the outcome looks likely to result in a hung parliament or a broad, technical coalition government. Should Italy face either of these outcomes, the ability of Italian politicians to assert themselves at the European level will be limited. Italians will still have strong preferences about what is wrong with Europe and what should be done to fix it. The point is simply that they will be unable to influence the wider European reform process without strong and effective domestic political leadership.