Can Matteo Renzi Save Europe from Austerity?

AP Photo/Michael Dwyer

Italian Premier Matteo Renzi speaks at Harvard University's Center for European Studies in Cambridge, as he continues a four-day U.S. visit, Thursday, March 31, 2016. 

Matteo Renzi, the youngest man to be elected prime minister of Italy since 1861, came to Harvard on the last day of March and spoke for about an hour to an audience of several hundred (video here). With the robust frame of a rugby fullback, the Italian premier is not a person one can easily imagine tip-toeing across a high wire. Yet on a tightrope is precisely where he finds himself today, precariously balanced between left and right at home and between pro-austerity and anti-austerity forces in the European Union.

Make no mistake: He is a man with the confidence necessary to venture across an abyss with the merest filament of support. Seeking to ingratiate himself with his Harvard audience, he invoked the memory of alumnus John F. Kennedy, who once remarked that “change is the law of life.” Italians—he might just as well have said Europeans—are too enamored of their past—“because it is so beautiful”—and therefore reluctant to introduce the reforms necessary to adapt to change and thus, according to Kennedy’s law of life, to survive.

All of Renzi’s political philosophy flows from this simple observation, that survival requires change. The European Union currently faces two threats to its survival: an identity crisis and an economic crisis. In his speech Prime Minister Renzi addressed the identity crisis first, no doubt because in the wake of the recent terror attacks in Brussels and of Europe’s decision to begin expelling economic migrants (as distinct from political refugees), questions of identity have dominated the headlines in recent weeks.

But the Italian prime minister recognizes that identity and economics are intimately intertwined. He candidly admitted that what is in trouble today is the European idea itself. It is a difficult idea for citizens to grasp, more difficult today perhaps than when the Treaty of Rome was signed in the mid-1950s. Then, the ravages of World War II were still fresh in mind. Today, citizens across the continent are questioning whether the advantages of allowing free movement of goods, capital, and people across borders are sufficient to compensate for the loss of sovereignty occasioned by EU membership.

Terrorists, Renzi said, understand this softening of support for Europe, hence they have begun to take a strategic approach to sowing disorder not only in the EU but around the world. By striking Brussels, they struck at the European ideal. What is more, the attack was mounted not from outside Europe but from within, by young men who had grown up within the EU’s borders. Hence a conventional approach to reinforcing security will not be enough. “For every euro invested in security, we need to invest a euro in education; for every euro invested in police, we need to invest in improving our cities; for every euro invested in cyber technology, we need to invest a euro in theater, sports, and museums, because our culture is the target of these terrorists.”

With the mention of spending, Mr. Renzi began to seem a little wobbly on his tightrope, however. To begin with, Europe is not currently spending much on security, so the promise to alleviate religious and ethnic tensions by matching security spending with cultural spending rings hollow. And even then, Renzi admitted, his desire to undertake such outlays did not yet enjoy the support of a majority of his European partners: “It is a very important position for the Italian government. I hope my European colleagues accept this approach.”

Of course, the lack of coordination among European governments is also at the heart of the economic insecurity that has undermined confidence in the European ideal. Renzi is fully aware of this: “Austerity is good for only one, two, or three countries, and even for them it will be a problem in the future.” Although he did not mention Germany by name, it was clear that the government led by Chancellor Angela Merkel, with whom Renzi maintains friendly personal relations, was one of those he had in mind. The Italian leader came into office in 2015 as the standard-bearer of Europe’s anti-austerity forces. In that unofficial role, he succeeded François Hollande, who carried similar hopes when he was elected in 2012 but failed to follow through.

Thus far Renzi has been no more successful than Hollande in pressing demands for a change of course in European economic policy, although he remains more outspoken. Where Renzi manages to project both optimism and firmness, at least rhetorically, Hollande seems resigned to following the German lead—probably to perdition in the next election, since his approval rating currently stands at 12 percent. By contrast, Renzi’s approval, though down significantly from the high of 70 percent he enjoyed on the eve of his election, remains in the high 30s. Ironically, both center-left leaders have pushed for similar reforms: Hollande secured the legalization of same-sex marriage with the Taubira Law and has proposed but not yet achieved labor market liberalization with the El Khomri Law. Renzi’s government has advanced toward but not yet achieved final approval of expanded rights for same-sex couples, while labor market liberalization more sweeping than Hollande’s is thus far his signature achievement.

Although it is far too early to judge the effectiveness of Italy’s structural reforms, the prime minister does take credit for increasing foreign direct investment from 12 billion euros a year before he took office to 74 billion euros at last report. He has also reduced the government budget deficit during his first year in office. But with a debt-to-GDP ratio of 132.5 percent, his fiscal headroom is limited, and he feels unable to raise taxes because, as he admitted with disarming candor, “the people will kill us—and the people are correct.” Growth is the priority, he says, but so are spending cuts: He reduced government spending by 25 billion euros.

In the audience at Harvard was the Italian economist Alberto Alesina, who is well known as an advocate of the “expansionary contraction” doctrine, according to which “large, credible, and decisive” spending cuts can lead to economic growth—a theory that has not been borne out by Europe’s experiment with austerity. Alesina asked whether the prime minister believed he could maintain the fiscal discipline he had demonstrated to date while simultaneously increasing spending on security, education, arts, sports, and the other public goods to which he had alluded at the beginning of his speech. Whether with Tuscan sprezzatura or a gambler’s instinct for the bluff, the erstwhile mayor of Machiavelli’s Florence replied that “our economic strategy is very complicated to explain to a great professor like you, because it is a combination. It is not a traditional right-wing approach. It is not a traditional Keynesian approach of taxation and investment.” But is it the right combination? Will the man turning the dials know in his fingertips that the correct combination has been found, or will his government, like previous governments, end in disappointment?

Renzi thinks he has found the secret to avoiding disappointment: institutional reform. Italy’s plague, he argues, has been governmental instability. He points out that his government is the 63rd of the past 70 years. Americans find this hard to understand, he says, because here, after an election, “the winner wins.” In Italy the winner must cope with a fractious coalition, which limits his power to introduce reforms. And it is the failure to reform that brings on populism. For Renzi, the remedy is therefore to change the election rules so that a party that wins more than 40 percent of the vote is awarded 54 percent of the seats in parliament and thus wields a majority. This change, the result of a deal cut with former prime minister Silvio Berlusconi’s Forza Italia, will take effect in Italy in 2018, but there is of course no guarantee that Renzi’s party will be the beneficiary when the voters go to the polls.

The prime minister’s optimism, though infectious, is not altogether convincing. French President Hollande came into office with solid majorities in both the National Assembly and Senate, his party in control of the lion’s share of French regional governments, and Article 49-3 of the French constitution, which usually allows a president to have his way with parliament whenever he dares to invoke it. Hollande’s reform efforts have nevertheless been timid and halting. A Renzi in firm control of his majority might well prove a less hesitant leader than Hollande, but Hollande has been stymied not simply by want of boldness but also by the balance of power in a Europe dominated by Germany and subject to intimidation by foreign investors.

Like Hollande, Renzi is also vulnerable to the left wing of his own Democratic Party, and like Hollande, he has largely written off this internal opposition: “I don’t think it’s important to discuss anything with them anymore,” he told The New Yorker’s Jane Kramer. But even the most adroit condottiere must beware of uniting his enemies against him. In addition to the leftists he dismisses as “ideological,” Renzi must contend not only with Forza Italia but also with two anti-EU, anti-immigrant parties: the Five Star Movement led by comedian Beppe Grillo and the Lega Nord led by Matteo Salvini. His luck may run out before he is able to consolidate his power in 2018. If he fails, the last best hope of Europe’s anti-austerity forces will have been defeated, leaving the national populists as the primary alternative to German hegemony.

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