Look to Italy to Understand the Political Response to the Eurozone Crisis

The fiscal pact agreed by European leaders last week will be implemented with or without Ireland. It has been in the making for a few months and central to Angela Merkels requirement for any further European integration. In Ireland the focus is on the immediate impact this will have on future fiscal policy and whether the government should hold a referendum. This a side show to the real politics behind what must be considered a historically significant event. 

The fiscal treaty is about providing the political cover for Germany to support a federal Europe. The question is whether Ireland wants to be part of this?

France, Germany and Italy, alongside the ECB, technocratic elites and influential financial actors are preparing for a fiscal European union. This is being driven by the functional need to avoid a debt default in Italy. Europe can sustain an Irish or Greek exist from the Euro. This is why European policy makers, and the German government, were so slow in formulating a European wide response to crisis in both of these countries. They only began to act when Italy was close to being priced out of international finance markets.

The Eurozone would break up if Italy voluntarily or involuntarily exited the Euro. Mario Monti has made this perfectly clear to Angela Merkel. Italian banks are by far the biggest recipients of the €500bn in funding made available by the ECB. Italy and European finance are inseperable.

The influential Nourini Roubini predicted Italy would be out of the Euro in November 2011 unless certain conditions were met. These included the establishment of common Eurobonds, a European wide Treasury and the ECB to become a lender of last resort. Technocratic elites in Europe have long recognised that these are required, in the long run, if the Euro is to survive. But they are waiting for Germany to act.

The fiscal treaty is the first step in a wider political strategy for the German executive to establish the political conditions for federal integration. They are being pushed into recognising this by the new Italian executive. It is highly questionable whether Merkel and Sarkosy actually think that Eurozone countries will achieve the structural deficit targets outlined in the pact. Based on current economic forecasts this is impossible. Recovery can only occur if Germany engages in a fiscal stimulus to offset the austerity in weaker regions.

Germany is reluctant to do this whilst Greece remains in the Euro. The treaty is a political signal to all member states that any further integration must be premised on the culture of stability that is so central to the history of Germanys political economy. Given that the Euro rests on Italy and Monti fully supports this cultural disposition he is in a powerful position to influence German decion making.

But the obsession with budgetary discipline will do nothing to solve the European crisis. Merkel and European elites must know this. The question is whether the treaty will push Germany to politically support the issuance of Eurobonds.

If the treaty makes makes no difference to the public policy regime of permanent austerity in Europe then the game is up. Ireland is a side-show to all of this. But an Irish referendum on the fiscal treaty would provide a unique historical opportunity (being denied to every other European citizen) to set the terms of reference for a robust debate across the continent on the future trajectory and policy implications of a Federal Europe.

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