The art of the possible: European reform after the Italian election

In a number of ways, the first Sunday of March was a perfect illustration of the state of European integration. In Germany, a five-month period without government came to an end with the endorsement by the German Social Democratic Party (SPD) of a coalition with the conservative Christian Democratic Union (CDU) and her Bavarian sister party CSU. By contrast, voters in Italy overwhelmingly decided in favour of eurosceptic if not anti-EU parties.

While the German vote opens the door to finally address the European reform agenda, the Italian vote appears to close it by taking a significant player out of the game. Whoever will lead it, the next Italian government will be a demandeur but not an architect of reform.

The fourth government under the leadership of Angela Merkel has put Europe high up on its agenda — not because it wants to be as ambitious on EU reform as French President Emmanuel Macron. Rather, Merkel‘s cabinet is guided by two other concerns.

First, the ‘duty to Europe’ helps to legitimize the SPD‘s U-turn from ruling out another grand coalition to entering one. Europe needs to be strengthened and that requires a stable majority German government. Europe now defines the Us and Them in German politics, with the pro-European centrist parties set against the anti-EU AfD and (to a lesser extent) Die Linke.

Second, European reform is important to Germany because it is important to Macron. In the German view, he delivers what Sarkozy and Hollande had promised but failed to achieve; his domestic reform agenda is too important for Germany to allow it to be weakened by a failure of his EU reform agenda. For Merkel and her government, Macron does not need to win big (and in fact should not, from the standpoint of German interests), but he must not fail.

The new German government is prepared to initiate some reforms of the Eurozone and fiscal policy, such as the establishment of a permanent European Monetary Fund (which was originally a German idea) and a new budget to fund structural reforms (though Berlin would prefer it to be open to all member states and not just the Euro-19).

The same attitude is taken on external security, where neither PESCO nor the French intervention initiative will solve Germany’s problem, but both look sufficiently worthy of support. And indeed, some movement on both issues seems necessary if Berlin is to obtain the support of France on a new approach to the migration/refugee/border security conundrum.

However, while the Franco-German tandem may be a necessary condition for moving ahead, it is not a sufficient one, and this is now clearly understood in Paris and Berlin. Substantial reform needs more than the cooperation of the EU-institutions and the Benelux countries, not least because neither can be taken for granted.

France needs like-minded others of significance to balance the weight of Germany, and Italy is its most important partner in that regard. Germany needs like-minded partners too, which traditionally has been Italy as the one other large member state interested in strengthening EU-institutions.

That is why the Italian national elections are such bad news for the Franco-German agenda. While sympathetic to the transfer aspects of the French reform agenda, neither the Five Stars nor the League are in favour of the framework and conditionality under which transfers would be delivered. Pointing at Brussels and Berlin, both parties have rejected external interference, and their campaign promises point into the opposite direction of what could be supported through EU funds. Also, they have no interest in the old Italo-German goal of “ever closer Union” and a European constitution.

But politics is only part of the problem in Italy. The state of Italy’s economy, public finances, and quality of governance is more significant in the reform context. Italy is the country where most refugees arrive, overburdening the country’s capacity. A European migration policy and European border force would require the active participation of Italy to be meaningful.

Italian banks are the reason (some would argue pretext) for Berlin to delay progress on banking union. With so many bad loans on the books, Berlin fears a mutualisation of debt through the back door, with European taxpayers propping up Italy’s banks. Furthermore, Italy’s structural reform gap is the Eurozone’s greatest risk. The third largest economy of the EU-27 suffers from absent regulatory reforms, the country’s vastly inefficient bureaucracy, and an overworked judiciary.

Adding to that the lack of will and capacity of a new and EU-averse government in Rome to tackle these domestic issues, it is clear that Italy will not be a positive force for European reform in the coming years.

Could other member states compensate for Italy’s absence? This seems unlikely. Of the other ‘big six’ members, Spain has its own domestic conflicts to deal with, Poland is opposed to most of Macron’s agenda, and Britain is leaving the EU.

What other options are there for Paris and Berlin, then? Ireland needs more help on Brexit than it can provide on the broader agenda; Portugal has done what it could in managing its financial crisis but remains vulnerable; Greece’s best contribution is to stay out of the headlines; Malta is too small and Cyprus remains a liability.

Bulgaria and Romania are absorbed with staying on track regarding the rule of law, anti-corruption and Schengen-readiness, with no excess political capital to spare, and the Visegrád group has positioned itself against any deepening of integration. Slovakia might be the exception to that rule, but only when it comes to Germany’s Eurozone agenda. The Baltic states appear open and cooperative, but lack the weight to win over others. They could join a coalition but they won’t build one.

This rundown of potential partners may sound cynical, but it reflects the problems for Macron and Merkel. The one other cluster of power left is the semi-organized group of the ‘affluent seven’ – the Nordics, Benelux countries, and Austria. These states have the financial means for action, but four of them have explicitly eurosceptic or nationalist parties as part of the governing coalition, and it is easier to find consensus among the group on what they don’t want the EU to be.

On Macron’s agenda (laid out in his Sorbonne speech last September) and a German response to it, something of a north-south divide has opened among them, with Belgium, Luxembourg and Austria remaining silent while their northern partners have drawn red lines.

This week the finance ministers of the Netherlands, the Scandinavian EU-members, the Baltics, and Ireland issued a statement cautioning against “nice to have” reforms, and urging Europe to stay focused on the necessary steps. Their agenda focuses on completing the single market and on keeping all member states involved on monetary issues, endorsing banking union and a European Monetary Fund, but keeping the latter strictly intergovernmental.

The statement might seem to strengthen the German position, but the support comes with strings attached: It ties Berlin to its own positions at a time when the interaction with France would require some greater flexibility. Likely, this is precisely what drove the eight finance ministers to speak out — to strengthen Germany but also to remind Merkel of the conditions for support.

In conclusion, nothing much is possible, but something needs to be done, because politics needs to be seen to be doing something. Europe is no exception to the bitter lessons of muddling-through-politics. The status quo has become impossible in several key areas of European policy, but European politics is not in breakthrough mode. This is not the time to reinvent Europe, though it seems crucial that the smaller steps that could be taken on fiscal and monetary issues, migration and security, are indeed taken. This is now the key challenge to Merkel and Macron.