Why Populism is Dangerous: The Case of Italy

Here is my latest article published on Impakter, the second in a series addressing populism:

Populism is dangerous and puts public health and the economy at risk. But it is hard to resist. Populist politicians thrive on fake news: it is so much easier to fuel people’s emotions if you feed them fabricated news of imaginary crises.

Italy is a harbinger of things to come in liberal democracies. It is where political change often happens first. The largest communist party in Europe outside the Soviet Union was in Italy; yet it was the first to go after the fall of the Berlin Wall. Berlusconi, a showy media tycoon who came to power in 1994 was a proto-Trump.

The public health crisis was addressed in a previous article. Here we look at  how populism handles the ongoing budget battle that is filling headlines and threatens to derail the European Union.

Again and again, populist politicians attempt to destroy the order that is causing problems instead of reforming it. The latest case is the Italian government's proposed budget. With an estimated deficit of 2.4% of GDP, three times as much as the previous government, the budget breaks all the European rules. If the government persists, there is concern that Italy could trigger a debt crisis like Greece did in 2010, a catastrophic scenario since Italy is ten times bigger than Greece.

Everyone expects Brussels to reject the proposed Italian budget. And what Euro officials say matters because the European Commission has the right to reject the Italian draft budget and demand a new one if Italy’s deficit targets do not change.

The IMF meeting in Indonesia this week was the occasion for several European leaders to pile up in their condemnation of Italy, starting with IMF Director Lagarde.  Even the usually restrained Mario Draghi, the President of the European Central Bank pointedly mentioned that “full adhesion to the rules of the European Stability and Growth Pact” was necessary to “safeguard” solid budget positions - a clear reference to Italy.  The President of the European Commission Juncker flatly said Italy didn’t respect its given word.

The financial world also reacted negatively, with the spread between Italian and German 10-year bonds widening to over 300 points, a five-year high; Italian three-year bond yields also rose to five-year highs at an auction on October 11. The problem is that higher borrowing costs for Italy make it difficult to run a higher budget deficit and finance the investments needed for higher growth. Add to this the planned termination of the European Central Bank’s quantitative easing program at the end of this year, a program that enables it to buy new bonds issued by European governments. Its termination couldn’t come at a more difficult time for Italy. Even the Italian Fiscal Board (an independent entity) and the Italian Central Bank are concerned that the proposed budget is based on unrealistically optimistic forecasts of economic growth (1.5 percent next year, 1.6 percent in 2020 and 1.4 percent in 2021).

For now, the Italian government is refusing to take a step back or review its proposed budget.

Read the rest on Impakter, click here.