Italy is in meltdown, Hungary in open revolt, and the US wants a trade war. Small wonder Europe’s leaders haven’t got much time for us

There is a weariness to the coterie of diplomats and officials based in Brussels intimately involved in the negotiations over the United Kingdom’s withdrawal from the European union. Privately they describe it as “Brexit fatigue”, the result of second-guessing a chaotic situation in Westminster for two years, and working through the summer in response to the demand from the Brexit secretary, Dominic Raab, for continuous negotiations. These officials from the 27 other EU member states were picked as the brightest and the best for the existential crisis of the time, but the hard truth for these ambitious men and women is that the crisis in question is no longer Brexit.

“You go to the capitals, you can see that, because no one talks about it any more,” said Fabian Zuleeg, chief executive of the leading EU thinktank, the European Policy Centre. Speaking to his parliament on his return to Madrid from the recent leaders’ summit in Brussels, Spain’s prime minister, Pedro Sánchez, put it succinctly: “The British spend 24 hours a day thinking about Brexit and the Europeans think about it for four minutes every trimester.” While the UK’s chaotic withdrawal has become a dreary process to be managed, the EU is being dealt hammer blows from elsewhere – from crises that really could make or break the bloc, along with many diplomatic careers.

Foremost on the list of problem zones right now is Italy. “Nothing and nobody, no big or small letter will make us backtrack,” the country’s deputy prime minister, Matteo Salvini, and leader of the far-right League, told his followers in a Facebook video made in his office in Rome on Friday. “Italy will no longer be a slave and will no longer kneel down.”

Last month the European commission took the unprecedented and high-risk step of rejecting the draft budget of the third-biggest economy in the eurozone, in a move designed to force the country’s democratically elected government to rein in its spending.

With borrowing at 130% of gross domestic product, second only to Greece in the EU, Italy is said to be a danger to financial stability across Europe. Its government has been told to come up with a revised financial plan by 13 November, or face huge fines.

The potency of the Italian problem is that it perfectly encapsulates the central, and potentially fatal, issue that the European Union member states and Brussels have repeatedly failed to grapple with in any meaningful sense, either from political cowardice or lack of will.

Facebook Twitter Pinterest Italian deputy PM Matteo Salvini has stoked up his nation’s budgetary standoff with the EU. Photograph: Alberto Pizzoli/AFP/Getty Images

When Ireland, Greece and Portugal were plunged into severe crisis as a result of the global recession, where they might once have changed their interest rates, or devalued their currencies, to get themselves back on their feet, instead their governments were simply forced to watch their young flee overseas.

Because they were eurozone countries, they had lost those crucial monetary levers. They were simply put on an austerity diet by Brussels in return for loans, and told to get their house in order at a brutal cost.

And for all the later admissions that the EU itself had been at fault in allowing such divergence in the fortunes of European economies in the first place, there has been little attempt since to build the institutional structures that could now help to promote growth in the poorest parts of Europe or respond to future economic shocks.

Jean-Claude Juncker, the president of the European commission, has called for a eurozone treasury and finance minister. There are repeated calls for the completion of the banking union, under which savers’ deposits, wherever they are held, would be guaranteed in times of crisis. But while prevarication has ruled the day, the wealth divide between the north and south of the eurozone has deepened.

According to International Monetary Fund data, the GDP per capita in Germany jumped 19% in 2016 from 2010 levels and 14% in the Netherlands and France.

In southern countries, where the GDP per capita was already lower to start with, it grew much more slowly. In Italy it rose only 6%, in Portugal 10% – and it fell 7% in Greece in the same period.

There is, meanwhile, a stench of double standards about the enforcement of the growth and stability pact under which governments have been obliged since 1997 to ensure budget deficits should be no higher than 3% of gross domestic product and that national debt is below 60% of GDP.

Loopholes and exceptions have traditionally ruled the day. “France is France”, Juncker said in 2016 of turning a blind eye to the debt levels being amassed by presidents in the Élysée palace.

Little wonder then that the new Italian coalition government of the populist Five Star Movement and the rightwing League has balked at the attempt to force such an economic strait-jacket upon Italy. And offered others encouragement.

Fabio Massimo Castaldo, a Five Star MEP who is a vice-president of the European parliament, told the Observer: “After some threats to cut the European funds, in 2016 the commission has pardoned Spain and Portugal for their public spending budget.

Facebook Twitter Pinterest Emmanuel Macron, who could give Europe new leadership after Angela Merkel’s departure, has seen his popularity plunge to new lows. Photograph: TASS/Barcroft Images

“This should serve as a precedent for Italy. It’s the path to follow to sort out the problems with the EU. Some EU commissioners should, also, realise that our government is the most appreciated right now among the European big countries. President Conte’s approval rate raised above 60% of the Italian population. Clearly we cannot say the same about [Emmanuel] Macron or [Angela] Merkel.”

Guntram Wolff, director of the Brussels-based Bruegel thinktank, said it was a ominous moment which indicated the potentially fatal contradiction at the heart of this imperfect union. He said: “What we seeing now is a tension between fiscal sovereignty at the national level – the Italian parliament can and should decide its own budgetary policies – and the fact that this sovereign country has subscribed to monetary union and there are conditions, including all the fiscal rules, and they have all signed the treaties.”

The timing could not be worse. Europe goes to the polls next May to elect members of the European parliament. The high drama is perfect succour for the likes of Steve Bannon, the former key strategist in Donald Trump’s White House, who has pledged to use the moment to start a populist revolution, with Salvini’s support.

“The governance and completion of the economic monetary union is important but it goes deeper than that,” Zuleeg said of the clash with Italy. “The issue is the fragmentation and the rise of populist illiberal governments in some countries using this process as a tool to prove to the electorate that they can deliver and also challenge the EU.

“Maybe from an economic perspective there is now an acceptance that you let the markets do their thing. The market will punish Italy, they will punish any other country that goes down that route. But how you deal with that situation politically is the real challenge. How do we deal with the mess that we are going to have after the European parliament election with a big bloc of anti-EU, anti-democracy parties, to put it very bluntly?”

Poland and Hungary, led respectively by the hard-right Law and Justice party and Viktor Orbán’s Fidesz, are already squeezing the maximum propaganda value out of the commission’s decision to launch its most serious disciplinary action against them for flagrant breaches of democratic norms. They know they are safe from the ultimate punishment of losing their voting rights, as each nation has promised to veto such a move should it come before the 28 member states.

Europe is crying out for leadership. And, perhaps when French president Macron – recently buffeted by approval ratings of 26% – is back from a break next week, said to have been necessary due to exhaustion, he can deliver it. But it not that is not something that Angela Merkel, the German chancellor who last week announced her decision not to stand again in 2021, following a series of electoral disasters, is likely to be offering for long.

“Populists are already hoping to bolster their numbers in the parliament next year, and use their newfound influence to affect the EU’s personnel choices and policy output over the next five years”, said Mujtaba Rahman, head of Europe for the Eurasia Group risk consultancy. “With Merkel now clearly in her twilight zone, they will see next year as a once-in-a-lifetime opportunity to fundamentally change the rules of the game in Brussels.”

Facebook Twitter Pinterest Hungary’s Victor Orbán has played up his role as the EU’s bete noire as it rebukes him for undemocratic policies. Photograph: Tamás Kovács/EPA

With such a gloomy outlook, it might suit Juncker and Donald Tusk, the president of the European council, to avert their eyes from the continent for a moment. But they probably won’t want to gaze towards America, for hanging over Europe is a trade war that could make the bloc a much poorer place.

Last July, Juncker visited the US president in the White House and came back having secured a temporary reprieve from a trade conflict that started with punitive tariffs on European steel and aluminium exports and had threatened to hit the European car market, particularly that of Germany.

An uneasy truce was reached before the midterm elections in which Juncker promised to talk about opening Europe to American imports, and made the absurd suggestion that the EU would buy more soy beans from US farmers in the midwest, a key Trump constituency. European farmers were already buying up soy beans from the US simply because they were the most competitive on the market as a result of the US-China trade war. Perhaps the conceit suited both sides then. But the soybean offensive looks likely to have run out of steam.

While seeking to avoid upsetting Trump on trade, the EU has so far set its position against the White House in relation to the US withdrawal from the so-called joint comprehensive plan of action, under which economic sanctions on Iran have been lifted in return for the regime curtailing its nuclear aspirations.

The EU has signalled its intention to protect European firms from sanctions, something the US ambassador Dennis Shea told the World Trade Organisation’s monthly dispute settlement meeting that Washington was “deeply disappointed” about. “We would encourage the European countries to consider carefully their broader economic, political, and security interests”, he is said to have warned.

The US will this week reimpose all sanctions on Iran that were lifted by the Obama administration after the 2015 nuclear agreement. The midterm elections, meanwhile, will be held on Tuesday, with Jeremy Shapiro, research director at the European council for foreign relations, predicting that a good set of results will ‘unleash” Trump from the wiser heads in the US administration, while a bad set could leave him “unhinged”.

Facebook Twitter Pinterest So what’s this about Brexit? For Donald Tusk, Britain’s problems are of minor concern. Photograph: Isopix/REX/Shutterstock

Rosa Balfour, a senior transatlantic fellow at The German Marshall Fund of the United States thinktank, said the fragility of the EU’s unity on foreign affairs, displayed by the contradictory responses to the murder of Jamal Khashoggi, could be exposed. “Germany stopped its arms sales, while France didn’t,” she said. “And on Iran we really need to see whether the member states will stick with what they said they will do.

“For me the trade and Iran bit have always been quite combined. Two at the same time is not smart probably if you don’t want Trump to get angry.”

A founding father of the European union, Jean Monnet, prophesied in 1978 that “Europe will be forged in crises”; he foresaw that the bloc would end up being “the sum of the solutions adopted for those crises”.

At a summit next spring, in Sibiu, Transylvania, in central Romania, Juncker has called for his fellow leaders of the remaining 27 member states to renew “a commitment to an EU that delivers on the issues that really matter to people”.

Andrew Duff, a former MEP, author, president of the federalist Spinelli group, and veteran observer of many a European crisis, is sceptical of a great leap forward. But he believes the leaders, buffeted by world events, should, for all their near indifference at times to the Brexit process, have the UK, the world’s fifth-biggest economy, in their mind.

“You can blame the British, and everyone is going to do that, but the fact that the EU has appeared to have been so unsettled and fractious and at odds internally on a whole host of issues from immigration to Putin to Trump, it hasn’t been a glorious spectacle,” Duff said. “The Brits aren’t to be blamed for falling out of love with the EU in those circumstances.”

Duff added that the EU must consider the scenario “where the Brits change their mind”. “And if you can find something that works well, grows the member states’ economies, and provides internal and external security, which is what we all want, there is a chance the Brits will change their minds. Especially if the future isn’t as glorious as the Brexiters claim it can be.” Brexit might not be on the EU’s mind today, but building a Europe that the UK may want to rejoin possibly should be.

November, 5

Washington will next week reimpose all sanctions on Iran that were lifted by the Obama administration after the 2015 nuclear agreement with Tehran.

Donald Trump, since breaking that deal in May, has vowed to cut off Iranian oil revenue completely, and EU companies trading with oil exporters and tankers face punishment from the US administration.

November, 13

The European commission wants answers from Italy on the budget it has rejected as being a risk to Eurozone stability. Brussels warned this week that it could launch excessive deficit procedure against Rome’s populist government at any time over its insistence on high spending and borrowing.

December, 18/19

Leaders from across the EU will gather in Brussels for a summit where it will be hoped that the withdrawal agreement and political declaration on the future relationship can be signed off with the UK.

March, 29

The United Kingdom is due to leave the European Union.

May, 9

At a summit in Sibiu, Romania, the leaders of the remaining 27 EU member states will try to grapple with the genuine reform needed, in particular of the Eurozone, so that they can deal with future financial crises, perform as a military union and maintain unity between the east and west of the European union at a time of heightened tensions.

May, 23 - 26

Europeans go to the polls to elect members of the European parliament. The French president, Emmanuel Macron has framed the poll as a battle between progressive and pro-European forces against those of the nationalist, eurosceptic and anti-immigration extreme right.