The Italian budgetary and financial crisis is getting worse.
The conflict between the Italian government and the European Commission on the proposed
budget is intensifying. It does not seem likely that the Italian government
will yield to the demands of the Commission to adjust the budget. This conflict
leads investors to continuing to sell Italian government bonds leading to a
surge of the yields on these bonds. It has become the major source of upheaval
in the Italian government bond market and risks escalating into a full-fledged crisis of the Eurozone.
Time to think again about the budgetary rules that are being
applied by the European Commission.
Since the Eurozone’s debt crisis in 2010, the European Commission
has seen a dramatic increase in its power to supervise and control national
budgets. This development was motivated by the will of the creditor countries
to impose budgetary discipline on the debtor countries, such as Greece,
Ireland, Spain and Portugal. As a result, the Stability and Growth Pact was
strengthened and the power of the European Commission over the budgetary
process of the euro zone member states was tightened.
The new responsibilities of the European Commission create a
problem of democratic legitimacy. Not in the sense that the Commission's
tighter role in the budgetary procedures of the Member States have been
achieved in an undemocratic manner. This increased power of the Commission is
the result of decisions in the Council of Ministers and in the European
Parliament. These are bodies that have been established in a democratic manner
and that have decided to give the European Commission more power over national
budgetary procedures after applying the majority rule. Formally there is
nothing wrong with the legitimacy of the European Commission.
However, I am talking here about political legitimacy. The
European Commission can now force countries to increase taxes and reduce
expenditures without, however, having to bear the political costs of these
decisions. These costs are borne by national governments. This is a model that
does not work.
National governments bear the political costs of expenditures
and taxes. The risk therefore arises that they will contest the decisions of non-elected
officials who do not bear these costs. This has happened a few times in the
past. In 2003-04, when their economies were not doing well, the German and
French governments collided with the European Commission about their budgets.
The European Commission wanted to force these governments to reduce their
budget deficits. Both governments refused to do this and the rules were changed
"à la tête du client".
Today the Italian government is doing the same. It is a
government that has made a number of election promises and wants to implement
them now. That has budgetary implications. The European Commission is now
trying to force the Italian government to abandon these election promises
without having to bear the political cost of doing so. The new Italian
government would pay the political price for shredding its election promises. It
will not do so, as the French and German governments did not do in 2003-04.
The model of top-down budgetary control does not work in
Europe. It does not work because the whole process of decisions on taxes and
expenditures still exists at the national level. It is also at the national
level that the democratic principle of "no taxation without
representation" is implemented. The European Commission's attempts to
bring Italy into line today are therefore also attempts to impose exceptions to
this democratic principle. It does not work, and fortunately so.
The only way out of this institutional crisis is to go further
into political unification. This implies that large parts of the national
budget processes would be transferred to the European Parliament. The principle
of no taxation without representation would then be applied at the European
level. This would raise the democratic legitimacy of the budgetary process to a
higher European level.
We are very far from such a political unification today. This
means that, at regular intervals, democratically elected national governments
will reject the European Commission's attempts to go counter the will of the
electorate.
One would hope that the European Commission
understands this quandary and that it takes a flexible position, allowing the
Italian government to have its budget deficit of 2.6%. It would be a bow of the
Commission to the outcome of a democratic change in Italy. It would also take
away a major source of upheaval in the Italian government bond market, and the
risk that this entails for the Eurozone as a whole.
