28 January 2016

Understanding Italian Defiance

from STRATFOR  -- this post authored by Adriano Bosoni
The Italian government has been in a rebellious mood of late. During a war of words with the European Commission over his plan to increase spending this year, Prime Minister Matteo Renzi told Brussels "Italy is back, more solid and ambitious." In an op-ed published in The Guardian a few days later, Renzi added that "the political and cultural orthodoxy that has monopolized thinking on how Europe should be run for the last decade isn't working" and promised that "Italy will not stop demanding to have its voice heard."
To be sure, Italy - the third-largest economy in the eurozone and a net contributor of funds to the European Union - believes it has cause to be annoyed with the bloc's officials. Rome views Brussels' constant requests for spending cuts as an obstacle to economic growth. It is also disappointed by the lack of progress in EU efforts to address the migration crisis. More recently, doubts over the health of Italian banks reignited a debate between Rome and the European Commission over Italy's plans to protect its banking sector.
But Italy's recent actions are based on more than short-term calculations; they are intimately connected to the way the country sees the world. To understand Rome's behavior, it is necessary to consider how modern Italy was born and what shapes its policies. Present-day Italy was created by combining dozens of unconnected pieces, constantly at risk from over a millennium of foreign invasions. Elements of Italian history mirror the European Union's attempts to create a united Continent, and they offer clues to the bloc's future.
A Fragmented State
Italy is a mountainous country. The Alps serve as a natural border with its northern neighbors, while the Apennines bisect the Italian Peninsula from north to south. Italy also controls Sicily and Sardinia, the two largest islands in the Mediterranean. This fragmented geography facilitated the emergence of strong local identities, something exemplified by the extensive variety of dialects spoken in the country.
Geography also explains Italy's unequal levels of economic development. The Po River basin in the north, which runs from the Alps to the Adriatic Sea, is one of the wealthiest regions in Europe. The richness of its soil, the river's navigability and the region's connection to other commercial centers in Europe enabled the Po Valley to become Italy's commercial and industrial core. These conditions fostered the growth of cities such as Turin, Milan and Venice, three powerful economic and political centers in constant competition.
By contrast, the south is characterized by lower economic development, the product of a semi-arid climate and an economy primarily based on agriculture. Failure to apply effective land reform before and after modern Italy's unification further hindered the south's development. This was in addition to the pervasive presence of groups and practices that exist in parallel to the formal system - from the grey economy to organized criminal organizations. Neither factor, however, prevented the emergence of important southern economic and cultural centers like Naples and Palermo.
Another key to understanding Italy's behavior is its location at the heart of the Mediterranean Sea. The Ancient Romans understood that the peninsula would never be safe unless they had some degree of control over the lands surrounding the "Mare Nostrum" (Latin for "Our Sea"), and so they built their massive empire around it. From the late 19th to the early 20th century, Italian governments similarly sought colonies in Africa and the Balkans, albeit with much less success. More recently, Italy has based its Mediterranean strategy on maintaining good relations with governments in North Africa so as to secure energy supplies, open business opportunities for Italian companies and prevent the arrival of sea-faring immigrants.
Italy's privileged position at the center of the Mediterranean Sea made it a target for invaders. From the Germanic invasions that ended the Western Roman Empire in the late fifth century to the invasions of the Austrian, Spanish and French empires in the 18th and 19th centuries, surrounding powers have repeatedly conquered Italy. This exacerbated the peninsula's political fragmentation. By the late 1850s, Italy was host to several political entities, including the Kingdom of Sardinia (under the House of Savoy), the Kingdom of the Two Sicilies (under Bourbon control) the Kingdom of Lombardy-Venetia (under Habsburg rule) and the Papal States.

Austrian Empire Chancellor Klemens von Metternich once famously derided Italy as "only a geographic expression." There is some truth to this statement. When Italy became a unified kingdom in the 1860s, Italians shared little beyond the Roman Catholic faith. For decades, there had been attempts to unify Italy under the figure of the pope, but as Machiavelli wrote in the early 16th century, the Catholic Church was "too weak to unify Italy, but too strong to let it happen."
So, to unify Italy, its new leaders had to create a country from scratch. To do this they had to introduce a common currency, the lira; create a standardized educational system that would teach a common language; form a national army to instigate some sense of patriotism; and build thousands of kilometers of rail lines to connect the country. But despite these efforts, many regional differences remained.
More important, Italy's unification also involved a great degree of state violence. "Unification" is often a poetic way to describe what was actually the annexation of the rest of the peninsula by the Kingdom of Sardinia. In the south, "unification" was very close to a civil war, with occupation forces from the north fighting a confusing combination of Bourbon loyalists, local peasants and brigands. A century and a half after these events, mistrust between the north and the south has still not been completely overcome.
The Role of Public Spending

Unification was expensive, which forced the fledgling state to start issuing foreign debt from day one. Young Italy was in a dangerous position: Bourbon loyalists were ensconced in Rome as the pope's guests, the dukes and grand dukes of Central Italy were waiting in the wings for the Savoys to make a mistake, and Austria and France were permanent threats. This prompted Italy to assume all of its predecessor states' debts, hoping that Europe's great powers would recognize and support the new country. This opened a cycle of foreign debt that still defines Italy.

Public spending and lax government continued to hold the country together during the 20th century. In the south, large amounts of public money were spent on subsidies to prevent social unrest, while the mafia progressively became a national phenomenon. In the north, the economic success of companies partially depended on the state willfully ignoring tax evasion. Italy's "economic miracles" of the 1960s and 1980s relied on a handful of national champions like Fiat and myriad small and medium-sized manufacturing firms clustered in specialized industrial districts of the north and center. The south remained largely neglected.

The prosperity of these years came at the expense of the public finances; little effort was made to keep public spending under control. Frequent devaluations of the lira helped Italy stay afloat while keeping unemployment low. Small and medium-sized companies remain the backbone of the Italian economy, and their lack of competitiveness and their inability to adapt to an increasingly globalized world is one of the main reasons why Italy was dealing with low rates of economic growth even before the European crisis. Complicating matters, the introduction of the euro deprived Italy of the possibility of devaluing its currency to deal with crises, while its national budget must now be negotiated with Brussels.

Italy's seemingly chaotic political system is also connected to history and geography. Politics in Rome are complex because the Italian government often operates as umpire among conflicting interests. Rome is under permanent pressure to find a balance between the general needs of the country and the many vested interests in play, from local, regional and national political leaders to labor unions, the private sector and the Catholic Church. One of the most notable Italian novels of the 20th century, The Leopard, uses the transformations of the 1860s as a metaphor for a country where reforms are often meant to protect vested interests. This coined a term ("gattopardismo," from the book's Italian title) that is as relevant today as it was when the novel was first published in 1958.
A Permanent Balancing Act

Italy's main geopolitical imperative is to achieve a minimum level of unity to prevent the country's disintegration while finding a balance between pressure from domestic and foreign powers - and preventing those foreigners from invading again.

This explains Rome's complex relationship with the European Union. Italy was a founding member of the European Economic Community, the EU's predecessor, because of its long tradition of intellectuals who saw the construction of a federal Europe as a means of overcoming the Continent's fragmentation by dissolving regional identities into a broader European identity. But foreign pressure was also a factor, because after World War II, the United States had an interest in Italy's membership in Western trade and defense alliances as means of promoting economic growth and limiting Russian influence.

Since then, Italy has used its strategic position at the heart of the Mediterranean to be attractive to the European Union and NATO while expecting them not to interfere too much with its domestic affairs. But the European crisis has made this balance hard to maintain. As the crisis progressed, Rome came under pressure from Brussels and international markets, which are fearful of the financial consequences of Italian political instability and lack of reform. This has forced Rome to negotiate internally and externally, seeking to apply just enough reform to appease foreign interests while keeping domestic dissent within tolerable margins.

An important element of Italy's strategy for coping with the EU crisis has been the premise that it is simply too big to fall. Many Italian politicians consider that the size of the country's economy means EU authorities will always ultimately come to the rescue. And they want Europe to do this without interfering too much in Italy's domestic affairs. This explains Rome's frequently strong reactions to Brussels' pushes for stricter fiscal discipline. The Italian government sees EU pressure as foreign interference in its domestic affairs and as a threat to internal stability. The ongoing debate between Brussels and Rome over Italian plans to create a bad bank are a part of this dynamic, as the European Union wants to prevent Italy from using public money to protect its banks.

Renzi presents himself as Europe's ultimate reformist, and his intentions are probably sincere, though he is most certainly making electoral calculations. His Democratic Party is still the most popular in the country, but it has lost support over the past year. Some of Italy's largest cities - including Rome, Milan and Turin - will hold elections in April, and Renzi has linked his political future to winning a referendum on constitutional reforms in October. The prime minister wants to be allowed to spend more in an important year, and he probably believes that anti-German and anti-Brussels rhetoric could win him some extra votes. The eurozone economic crisis has evolved into a political crisis where a growing number of voters oppose the European Union and the political elites who back it.

Renzi has a point when he says that the Italian opposition is fragmented, but if all the anti-establishment, nationalist and right-wing parties are combined, about half of the electorate supports forces that oppose different aspects of the process of EU integration, from the common currency to the free movement of people. At a time when prospects for growth are modest and unemployment remains high, Italian support for the EU can no longer be taken for granted.

Rome wants to be part of a Continental bloc where high public spending and inflation are tolerated to create jobs, and where resources are transferred from wealthy regions to poorer areas without interfering too much in their domestic affairs. But the Germans and the Dutch do not want to permanently subsidize the Portuguese and the Greeks, at least not without greater control over their economies.

Italy faces a fundamental problem: the kind of European Union the Italians want to build is similar to the type of country they have struggled to create at home. Italy is a miniature version of the European Union because it has a Germany and a Greece within its borders, in the form of a dynamic north and an underdeveloped south whose interests are not always aligned. It took a combination of money, compromise and coercion to build a unified Italy. In the European Union, the economic crisis has tarnished the promise of prosperity, compromises are becoming harder to find and coercion is not a basis for a sustainable Continental project. And while the Italians of the 1860s at least had some vague sentiment of a shared destiny, the same cannot be said of the current European Union.

"Understanding Italian Defiance" is republished with permission of Stratfor.

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