May 29, 2018
Steven Erlanger, The New York Times
LISBON — Through more than two months of tough negotiations to form a government in Italy after inconclusive March elections, global financial markets remained relatively calm. Italy’s uncertainties seemed contained to Italy, and Europe’s economy kept growing.
That changed this week when Italy’s president, Sergio Mattarella, effectively blocked two populist parties from forming a government. He judged that a crucial member of their proposed cabinet was intent on having Italy abandon the euro, though they had not explicitly campaigned on that issue.
In doing so, Mr. Mattarella may have laid the groundwork for a new election, one that amounts to a referendum on the euro. The European Union and financial markets reacted with dread. On Tuesday, the Dow plunged almost 400 points, the value of the euro plummeted and the cost of borrowing for Italy shot up.
For the European Union, another Italian election would be terrifically bad timing.
Chancellor Angela Merkel of Germany, a linchpin of the bloc, is weakened; she needed six months to form a government after a rough election of her own last year that was marked by a far-right, populist surge. Spain’s government could face a no-confidence vote as early as this week and possible new elections as well.
However unlikely an Italian withdrawal from the eurozone may be, the mere prospect is more dangerous to the future of the European Union than the bailout of Greece, whose economy is dwarfed by Italy’s; Britain’s vote to leave the bloc; or the squabbles over the rule of law with Hungary and Poland.
Italy is a founding member of both the European Union and the euro and the bloc’s fourth-largest economy, and psychology counts.
After all, it was Brussels that warned Greece in 2011 that a proposed referendum on its bailout and the euro would actually be a referendum on membership in the European Union itself. That was enough to cause Greece to back down. It did so again four years later.

But the common currency is not without its problems. The European Union plunged into the euro without having either the economic institutions to fully manage it or full political integration. Member states gave up their authority over monetary policy, often to deleterious effect at home.
Today, not only will the issue of sovereignty not go away, it keeps roaring back with a vengeance, just when populism in Europe’s core countries seemed to have been kept at bay.
After the shock of Britain’s vote in 2016 to leave the European Union, the bloc seemed unexpectedly steady. Italy had a pro-Europe government for several years. Spain and Portugal were growing again. France’s anti-Europe presidential candidate, Marine Le Pen, was defeated. Even the populist Prime Minister Alexis Tsipras in Greece was grudgingly holding the line on spending in order to stay in the eurozone.
But the turmoil in Italy makes clear that anti-European populism has not gone away, and that the euro is in the cross hairs.
Mr. Mattarella has turned to a former International Monetary Fund official to be a caretaker prime minister and form a government. But even he seemed to have hit a wall late Tuesday evening, making the prospect of another election — as early as July or September — more likely.
Matteo Salvini, the fiery leader of the League, the populist party that is strong in Italy’s north, has made opposition to Brussels, and occasionally the euro, a standard in his campaign speeches.
His putative coalition partner, Luigi Di Maio, leader of the populist Five Star Movement, has been sharply critical of Brussels, but has lately rejected a referendum on the euro, despite having previously floated the idea.

Mr. Mattarella, moderate and pro-Europe, was clearly skeptical of their intentions, and he vetoed Mr. Salvini’s pick of an economy minister with openly anti-euro views, in the name of economic stability.
In doing so, Mr. Mattarella has given Italians, exceptionally, the same option built into the French election system — two rounds of voting — the first to vote your heart, and the second to vote your head. In France, Ms. Le Pen did well in the first round of presidential voting last year; she was soundly defeated in the final round.
Mr. Mattarella is gambling that Italians may do the same, if the populist parties can be made to surrender their ambiguity on the euro — an issue they skirted through the Italian campaign.
As of November, a poll by the European Commission, the bloc’s bureaucracy, showed that nearly 59 percent of Italians preferred European economic and monetary union with a single currency, the euro, while 30 percent were opposed.
The risks of leaving the euro have always been a reason Italy has stayed in. But the country has not done well with the euro, by some measures, and so the question now is whether a public frustrated by two decades of stagnation is ready to take a gamble of its own and bolt.
As demonstrated by the Brexit vote, which numerous analyses showed would not be good for Britain’s health, economic logic does not always prevail.
Like Ms. Le Pen, Mr. Salvini may discover after a public debate that despite anger at Brussels over migration and the problems of the euro, Italians, like the French and the Greeks, are afraid to leave it.

But Mr. Salvini has also proved himself adept at playing populist passions and has again made opposition to the euro and its “elite” supporters central to his politics.
Many analysts believe that Mr. Salvini, whose League has risen in the polls, will do well in a future election, and some think he sabotaged this coalition government to get to new elections.
He is expected to use Mr. Mattarella’s attempted appointment of a technocratic — if temporary — prime minister to reinforce the League’s anti-elitist message and portray himself as standing up against anti-democratic forces beholden to Brussels, Berlin and the bankers.
The euro may have originally been a project of the political elite, and it may indeed benefit Germany, but the consequences of leaving it would be big. Those would be likely to include a devalued Italian currency that would savage Italian savings accounts overnight and increase the country’s already large burden of debt.
That is one reason Mr. Mattarella argued that any decision to leave the euro should come only after a major public debate, not by stealth.
Then there is the potential damage to the European Union itself. The bloc has moved since the Greek crisis to create backstops for the euro, so the currency would almost surely survive an Italian exit and manage the economic contagion. But the damage to the idea of Europe would be severe.
Italy’s confusion about its political and economic future — and its already large stock of nonperforming loans — are more reasons Germany will continue to refuse to mutualize eurozone debt and provide bank deposit guarantees across the eurozone.

As Holger Schmieding, chief economist of Berenberg, an investment bank, points out, “Size matters.” Italy today accounts for 15.4 percent of the eurozone’s gross domestic product and 23.4 percent of the bloc’s public debt.
By comparison, he said, at the start of the Greek crisis in 2009, Greece contributed only 2.6 percent of the eurozone’s gross domestic product and today accounts for only 3.3 percent of eurozone public debt.
Italy’s cumulative debt is more than 130 percent of gross domestic product, more than twice the eurozone’s requirements, and it is denominated in euros. Having to repay that debt in a devalued currency would be a major struggle and would badly harm Italian savers and investors, who hold most of it.
The Italian crisis also has other implications, said Ian Lesser, vice president for foreign policy at the German Marshall Fund and head of its Brussels office.
“The political debate in Italy has taken on an increasingly critical tone toward Germany, speaking directly to Italian anxiety over German power in Europe,” Mr. Lesser noted. That anxiety is shared widely, not just in Greece but in other populist-run states like Hungary and Poland.
And a prospective populist government “is not only deeply anti-E.U. but with a lot of sympathy toward Russia and without traditional Atlanticist instincts,” Mr. Lesser said.
Italy is a key member of NATO and has important naval and air bases for Middle East operations. “It threatens key elements of continuity in Italian politics, in both the European and trans-Atlantic sphere,” Mr. Lesser said.
European Union arrogance could also play an important political role.
On Tuesday, the European Commissioner for the budget, Günther H. Oettinger, a German, told the broadcaster Deutsche Welle that the markets and a “darkened outlook” would teach the Italians to vote for the right thing.
They may yet do so, but it’s impolitic to say so, especially for a Brussels-based German.



The need to end lax monetary policies has revived concern – probably 15 years too late – about excessive public debt
BERLIN – US President Donald Trump’s decision earlier this month to withdraw the United States from the Iran nuclear agreement, and to shift toward a policy of renewed sanctions and confrontation, will make the future of the Middle East even more uncertain. The signs in the weeks since have not been encouraging.
Trump’s decision cannot be justified by any breach of the agreement on Iran’s part. It is, rather, a return to the old, largely unsuccessful US policy of confrontation with Iran. The only difference this time is that the Trump administration seems determined to go to the brink of war – or even beyond – to get its way.
If the administration has any plans for keeping Iran’s nuclear program in check in the absence of the nuclear deal, then it is keeping them a secret. Judging by some of the administration’s rhetoric, it would appear that airstrikes against Iran’s nuclear facilities are on the table. But bombing would only delay Iran’s nuclear program, not stop it. Would Trump then consider a massive ground war to occupy the country and topple the regime? We know all too well how that strategy worked the last time it was tried.
The Joint Comprehensive Plan of Action (JCPOA) concluded by Iran and the US, the United Kingdom, France, Russia, and China, plus Germany and the European Union, was not intended only to prevent a regional nuclear-arms race or a military confrontation. It was also supposed to be the first step toward creating a new, more stable regional order that would include Iran.
The old order was established by the World War I-era Sykes-Picot Agreement between Britain and France, which largely created the national borders that exist in the region today. A century later, it is clear that the old order has become obsolete, given that it no longer provides any semblance of stability.
Instead, the most important regional players – Israel, Iran, Saudi Arabia, and Turkey – have all been vying for influence in the war in Syria, and collectively sliding toward a hopeless conflict for mastery of the entire region. Because no one country is strong enough to eliminate or subdue the others, this escalating struggle promises only years, if not decades, of war.
The region’s instability can be traced back directly to the US-led invasion and occupation of Iraq in 2003. With the toppling of Saddam Hussein’s regime, Iran suddenly gained an opportunity to pursue a kind of quasi-hegemony in the region, starting with its Shia-majority neighbor. And after a series of mistakes by the West in Syria, Iran was able to establish an unimpeded presence stretching all the way to the Mediterranean.
This is the backdrop against which the JCPOA was negotiated. The deal was meant to reintegrate Iran into the international order, thereby encouraging it to play a more responsible regional role. But Trump’s decision has foreclosed that possibility, leaving Iran’s future role in the region an open question. Make no mistake, though: one way or another, Iran will remain an integral part of the Middle East. It is an ancient civilization that cannot simply be sidelined or ignored, unless one wants to invite even more chaos.
Having abandoned the framework for influencing Iran by diplomatic and economic means, the Trump administration’s only alternative now is regime change. Clearly, White House hawks such as National Security Adviser John Bolton have not heeded any of the lessons from the US debacle in Iraq. Given the failure to bring stability to that country or to Syria, it should be obvious that escalating a confrontation with a much larger country like Iran has little to recommend it.
Unfortunately, the JCPOA probably cannot survive the reimposition of US sanctions. European firms are not going to forsake the much larger American market just so that they can maintain ties with Iran. And once Iran loses its economic lifeline from Europe and other parts of the world, it might well decide to restart its nuclear program, or even to withdraw from the Nuclear Non-Proliferation Treaty, raising the risk of war.
Moreover, Russia and the US are further undermining nonproliferation by modernizing their nuclear arsenals. Where once their leaders talked about mutually agreed arms reduction and verified disarmament, now they are more interested in miniaturized nuclear warheads that can be used as bunker busters.
When the world’s two leading nuclear powers behave like this, the prospect of another major war in the Middle East becomes all the more terrifying. After all, with Russia’s deeper involvement in Syria, the risk of a clash between Russian and Western forces in the region has already been growing. And it is not as though Russia would simply give up its new position of strength by abandoning Iran now.
None of this bodes well for Europe, which will be directly affected by an escalation of tensions in the region, owing to its geographic proximity and historic obligations to Israel. In the event, the EU would have to lead on finding a negotiated solution that addresses both the hegemonic intentions of regional players and the issue of nuclear- and conventional-arms control.
For now, Europe must assert itself as a voice of reason, by holding firm to the idea of a peaceful reordering of the Middle East – regardless of how difficult this task may seem at the moment. Europeans know all too well the consequences of endless hegemonic struggles. The EU was established as a response to a century of war and terror that brought Europe to the brink of self-destruction. The lesson since then has been clear: only reconciliation and cooperation can ensure a peaceful regional order. Trump’s way – hegemony – means chaos.