The Meloni government, public indebtedness and the return to the stability and growth pact

This year 2023, from the point of view of EU policy, brings an important new development that will affect all 27 member states of the European Union, including the Republic of Italy: the return to the Stability and Growth Pact, which has not been applied for the past three years due to the devastating consequences of the "coronavirus". A pact which, as is well known, dates back to the Treaty on European Union (Maastricht (Netherlands, 1992)), and which on many occasions has been a headache for many governments, with some even being intervened by the so-called "Troika" (International Monetary Fund, European Central Bank and European Commission): this was the case of Greece on several occasions (2010, 2012 and 2015) and Italy in 2011 (imposed by the Monti government, 2011-13). 

When the so-called "sovereign debt crisis" began in 2008, it was the countries of central and northern Europe (Germany, the Netherlands, Austria, Denmark, Sweden) that imposed rigid austerity in the control of public spending in the face of the reality that the third (Italy) and fourth (Spain) economies of the eurozone had their respective public finances completely out of control: While the government headed by José Luis Rodríguez Zapatero had a deficit deviation of no less than eleven points in mid-2010, the transalpine government was already approaching 123% of national debt over GDP, when the Stability and Growth Pact had stipulated that this should be at 60%. 

This austerity in public spending, whose architect was the then German finance minister (Wolfgang Schauble), had very pernicious effects in the countries of southern Europe: in Spain Podemos and VOX appeared, and in Italy the Five Star Movement, to which was added a new design of the League, which, under Matteo Salvini, became ultra-nationalist, populist and, above all, anti-European. Consequence: in Spain, ungovernability, with repeated repetition of general elections as a result of the constant deadlock between parties; and in Italy, a pact ("government contract") between Five Star and the League that kept the eurozone's third largest economy in constant litigation with the EU institutions between June 2018 and August 2019. And, above all, in both countries, the realisation that both political life and society were highly polarised. 

The European authorities learned from their mistake, and given the exemplary behaviour of both Spaniards and Italians in complying with the measures against the "coronavirus" (which, for example, neither the British nor the Swedes did), in July 2020 they decided not only to create a European Reconstruction Fund (Recovery Fund), but also to grant all EU countries the possibility of approving general state budgets that would expand public spending for the years 2021, 2022 and 2023. 

The truth is that, three years later, the policy of "opening the hand" on public spending has not served to solve the problem of the finances of each state: the year 2022 closed with 177% debt over GDP in Greece; 154% in Italy; 118% in Spain; 116% in Portugal; and, finally, 112% in France. In contrast, Germany's debt-to-GDP ratio stands at 67%, Austria's at 78%, the Netherlands' at 51%, Denmark's at 31% and Sweden's at 34%. 

Knowing that neither some (those in favour of reducing public spending) nor the others (those in favour of expansionary budgets in that same spending) have found the formula that will achieve the longed-for convergence of the European economies (whether they belong to the single currency or not), in recent weeks the member countries of the Union have been negotiating intensely (with not a few tensions in between) the way in which the Stability and Growth Pact will be applied in the coming years. Finally, it was agreed that debt reduction should be spread over four to seven years; that governments should determine the pace of consolidation; that the idea of uniform debt reductions at a recession-prone pace (0.5% per year) should be eliminated; and, finally, that the consolidation of public finances should go hand in hand with the necessary growth of the economy. 

What Germany and its central and northern European allies did get away with, however, was maintaining two key rules of the Stability and Growth Pact: 60% debt to GDP and a 3% annual deficit. Something foreseeable because Draghi and Macron, when they coincided at the head of government in their respective countries (February 2021-July 2022), and on the basis of mutual support underpinned by the so-called "Quirinal Treaty", had already tried to raise the debt-to-GDP ratio from 60% to 100%, without the slightest success. Now Draghi is out of the presidency of the Council of Ministers, and Macron has his country in revolt for raising the retirement age from 62 to 64. It is true that he has in his favour the strength of his institutional position (no ruler in the whole of Western Europe has as much power in his country as the President of the French Republic) and the determination and political "wit" that have marked Macron's political action since he first won the presidential elections (May 2017), but it is no less true that the country has been in a permanent state of tension and unrest in the streets for months. 

In the case of Meloni, winner of the "political" elections in September 2022 and with five years of legislature ahead of her in a parliament where the centre-right coalition enjoys a big advantage over a decimated opposition, she is hardly feeling the wear and tear of almost seven months in government. But it also knows that the worst is yet to come. Because the General State Budget (PGE) for the year 2023 was drawn up on the basis that interest rates would be 2%, but they have been rising over the months and are now already at 3.75%: in other words, their budgets have been completely out of step with the reality that the financial situation has changed for some months now.  

Because a continuous rise in interest rates decreed by the European Central Bank (ECB) hurts the most is the most indebted countries, because they have to spend more and more money on paying interest on their debt. And also with increasingly unsustainable "welfare states", due to the growing ageing of these countries, the sharp drop in the birth rate (the year 2022 was the first year in Italy in several decades in which there were fewer than 400,000 births in a country with 60 million inhabitants and where only nine of them are under 18 years of age), the pernicious effects of labour reforms, which have only reduced the level of disposable income of workers, not to mention other elements, such as an excessive volume of public workers and the chronic corruption of some governments in these countries. 

Meloni already knows what awaits him: reducing the debt, accepting everything or almost everything that the European Union imposes on him (because at stake is the 375 billion euros of the PNRR, the document drawn up by the Draghi government whereby the eurozone's third largest economy would have this huge sum of money in exchange for carrying out a broad programme of reforms), and recognising the weakness of not belonging to any of the main European families. The fact is that the "Populars", Socialists, Liberals and Greens are far more numerous than Meloni's group in the European Parliament, called "Reformists and Conservatives", and where the departure of the British from the Union has left them even weaker. 

And yet it should be remembered that the bloated public debt of the eurozone's third largest economy is not the fault of Meloni or previous governments, but dates back to the 1970s and 1980s, because it is attributable to the various governments of the now dissolved Christian Democracy (DC), which engaged in excessive public spending due to their tendency towards clientelism. But between that increase in the level of indebtedness, plus the sharp loss of competitiveness as a result of joining the single currency from the outset (the various transalpine governments constantly devalued the national currency (the lira) to make it easier to introduce their products on international markets), Meloni and his new government have very difficult months ahead of them, in which unrest will grow and the popularity of Roman politics will decline. Related to this, administrative elections in May and June, and government elections in some regions such as Molisse, Abruzzo and Basilicata await him. In those held in Lombardy and Lazio (13 February this year) Meloni had the most votes, but it was time to implement expansionary budgets in public spending, budgets that are now coming to an end: we will see in these elections to be held in the coming months whether Meloni continues to be so popular. 

For the moment, the Roman "premier" already has a serious problem on the table: an exponential growth in the flow of irregular immigration, which led her a month ago to have to decree a "state of alarm" for six months. A problem that will become ever greater because the EU authorities do not intend to force the member states to redistribute the immigrants arriving on the transalpine coasts and, on the other hand, the months of higher temperatures are arriving, which facilitates the proliferation of boats from the coasts of North Africa. Fortunately for her, the controversial Salvini and his populist rhetoric is no longer at the helm of the Interior Ministry, but Matteo Piantedosi, a person who has been in this ministry since the late 1980s and who knows how to handle this issue much better in terms of avoiding unnecessary conflicts with EU leaders. 

The truth is that the transalpine government will have to devote a lot of resources to contain a new wave of migration, especially if the "failed state" that exists today in Libya is compounded by a worsening of the recession in neighbouring Tunisia. But one thing must be very clear: if a leader of Macron's strength (at the head of the eurozone's second largest economy and with very good support in the European institutions) has been forced to raise the retirement age by two years, what will the Union not ask of a Meloni whose only "strong" man in the EU institutions is his deputy prime minister and Foreign Affairs minister Antonio Tajani?  

We shall see what happens, but the impression is that the second half of this year will be much more complicated for this young Roman politician (the first, by the way, to preside over the Council of Ministers in 77 years of republican history) than the first half. All this without forgetting that she won the elections with what Matteo Renzi, senator for Campania and now in the opposition (within the so-called "Terzo Polo"), called a "programme of unrealisable promises". If Renzi already saw them as "unrealisable" (and he knows EU politics like few others) in September 2022, how much more "unrealisable" will they be seven months later, let alone after that? Time will tell.  

Pablo Martín de Santa Olalla Saludes is a lecturer at Camilo José Cela University (UCJC) and author of Historia de la Italia republicana (Sílex Ediciones, 2021).