Many observers have noted that populism is inherent to representative democracy; after all, do populists not juxtapose ‘the pure people’ against ‘the corrupt elite’? – Cas Mudde

On April 25, 2017, I wrote the following words in an article titled The EU’s Two Intractable Issues & Election Anxiety:

Brussels is breathing a sigh of relief. Macron is heavily favored to win the runoff election according to polls.

But Brussels should not feel overly confident with this short-term respite. While Le Pen is likely to lose the runoff election, it’s telling that candidates from the French establishment parties were defeated.

Italy may be the true test for the European Union. Indeed, Italy may be the place where the fate of the European Union is decided.

The European Union is in jeopardy from within – and of its own makings. The choice of a common currency laid the foundations of failure. Allowing the immigration crisis to continue unabated may have caused failure to be realized.

Keep your eyes on the shifting political sands of Italy. The battle for the future of the European Union may well be fought there.

Fast forward 13 months and the Western Europe now has their first “populist” government.

Italy ended three months of political turmoil when a coalition deal between the anti-establishment parties, League and 5-Star Movement, ushered in a new government after an inconclusive election in March 2018. The new alliance will have a slight majority in the Italian Senate.

“All the conditions have been fulfilled for a political, Five Star and League government,” said Luigi Di Maio, the Five Star chief, and Matteo Salvini, the League leader, in a joint statement after a day of talks in Rome.

Giuseppe Conte, a relative unknown, was named as Italy’s Prime Minster.

The coalition was revived after Five Star and League reached an agreement to substitute Paolo Savona, an anti-Euro economist, for Giovanni Tria, an economics professor, as Italy’s Economy Minister. Savona will instead become head of European Affairs.

Savona had previously said that Italy should have a contingency plan to abandon the Euro. Tria is critical of the European Union but unlike Savona has not advocated for an outright abandonment of the Euro.

Italy’s new cabinet will include:

Interior and Deputy Prime Minister – Matteo Salvini (League)

Labor & Industry and Deputy Prime Minister – Luigi Di Maio (5-Star)

Foreign – Enzo Moavero Milanesi (Independent, ex-European Affairs minister)

Defense – Elisabetta Trenta (5-Star)

Economy – Giovanni Tria (Independent)

European Affairs: Paolo Savona (Independent – original choice for Economy Minister)

Undersecretary for Prime Minister – Giancarlo Giorgetti (League)

The new government has proposed increased spending along with a clampdown on illegal immigration. It’s hoped the parties will moderate their spending plans. Italy is the second-most debt laden country in the EU – with Greece holding the number one position.

The European Union has long faced problems from its common currency, the Euro. A common currency accomplishes many things – none of them particularly positive.

When a stand-alone country encounters economic headwinds it can respond by adjusting its monetary policy (interest rates, available currency) accordingly. But the European Union must adjust its monetary policy based on the average overall condition of its member countries.

The EU is also forced to give a greater weight in its monetary policy to the singular economic powerhouse of Germany. This creates a situation of perpetual interest rate imbalance.

Interest rates will be too low in countries where wages are rising and too high in countries where unemployment is rising.

Another related problem exists. Prior to the Euro’s creation, if a country engaged in monetary recklessness (increased debt, spending, etc) the markets would respond with higher interest rates and/or falling currency prices via exchange rates.

This controlling mechanism was removed with the creation of the Euro.

In practical effect, the stronger, more fiscally disciplined EU economies are not only subsidizing EU countries that choose to engage in more reckless monetary policy and actions – they essentially encourage them to do so.

The newly formed Italian Government is already speaking out against these intractable problems.

Paolo Savona, the original choice as Italy’s Economy Minister:

It’s Germany that should ditch the euro because its economy’s growing surplus is not compatible with the fixed change rate regime regulating the Eurozone. Or, at least, it should accept to move to a system that accepts changes to the rates.

Unfortunately for the European Union, Savona’s view was immediately echoed by Savona’s replacement for Economy Minister, Giovanni Tria:

[This is a] serious economic analysis and not an outburst coming from anti-euro politicians. German economy’s growing surplus shows that monetary expansion, without a policy that aids economic convergence between the various countries, merely fuels an imbalance that puts us in conflict with the rest of the world. It is time to abandon many taboos [on the Euro].

Meanwhile, the move to address Italy’s high cost of illegal immigration is moving forward:

At a rally in northern Italy, new Interior Minister and League leader, Matteo Salvini, warned: ‘The good times for illegals are over – get ready to pack your bags.’

Italy’s new populist leaders commemorated the founding of the Italian republic by attending the pomp-filled military parade – and then promised to get to work creating jobs and expelling migrants.

The European Union will face a whole new partner governing its fourth-largest economy.

A new partner indeed.

Keeping election promises is becoming more and more popular. https://t.co/emJYJuDb55 — Nigel Farage (@Nigel_Farage) June 3, 2018

The new Italian Government has grabbed the full attention of both Merkel and Brussels. As it should.

European Union leadership in Brussels has proven itself markedly inept at responding to crises – and fiscal management in general.

Some member countries feel burdened by the subsidization of financially weaker member nations. Other countries are weighed down by the financial constraints placed upon them. The level of regulation put in place has been both staggering and costly.

The European Union is a political structure – a politically desired outcome. It is not something driven by free markets – although these same markets are driving global integration.

Like all politically driven outcomes, the European Union is doomed to ultimate failure if it’s not concurrently supported by free markets.

At some point the political is overwhelmed by the hard realities of the economic.

The new Italian government has been derisively labeled as populist, but there is no populism ideology to speak of.

Populism is, quite simply, the response of citizens to the failure of their leaders.

Brussels has every right to be worried.

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