Italy's political crisis has brought Europe's currency crisis back with a vengeance, and just about everything the establishment is trying to do to stop it is only making things worse.
The problem is, for the first time since all this started 10 years ago, Europe is facing the prospect of a country being led by a government that might genuinely want to leave the euro. The closest Europe had come to this before was three years ago when Greece's far-left party Syriza threatened to do so as a bluff to try to win better terms on the country's bailout package. It didn't work.
Italy's newly ascendant far-right party the League, though, doesn't seem interested in mere concessions so much as freedom — the freedom to cut taxes and deport immigrants as much as it wants. Neither of those, of course, is allowed under Europe's current rules. Which is why the League has played a double game where it's said it doesn't want to take the country out of the euro at the same time that it's pushed policies and personnel that suggest otherwise.
Now, there are two things to understand about Italy's dangerously dysfunctional politics. The first is that its mainstream parties have imploded under the weight of corruption scandals and an economy that, even when you account for the graying of the population, hasn't grown at all the past 15 years
And the second is that its populist parties, which led the two biggest blocs in the most recent elections, were initially blocked by the head of state President Sergio Mattarella from forming the government the League in particular had wanted. He did so because he was worried that their choice of finance minister — a longtime euroskeptic named Paolo Savona who has said they need a "Plan B" to leave the common currency because "Germany has not changed its vision of its role in Europe since the end of Nazism" — might lead to the country leaving the euro, despite the fact that nobody had campaigned on that. The League had pointedly refused to even entertain a more euro-friendly candidate, making it look like that's what they'd wanted all along, before they abruptly did an about-face and agreed to a compromise where Savona would get a different post in the government. This, apparently, was enough for Mattarella. Italy's outsiders are now inside the halls of power.
You'd be forgiven, though, for thinking that the real lesson here is that democracy euro-style means that governments have to do what Brussels says or there will be elections until the voters get it right. It's uncomfortably close to the truth. At this point, it might be simpler just to dissolve the people and elect another one instead.
But the worst part of this short-lived attempt to keep the League from gaining power is that in the long run it might only help them gain more of it. Indeed, its poll numbers were up more than anyone else's the past few days as it portrayed itself as the victim of Teutonic aggression for having the temerity to say it'll put "Italians first." (Yes, that's really its motto.) That's really the only way things could get more dire than they already appear. Right now, you see, the League isn't even Italy's biggest party. That's the Five Star Movement, an Internet-based protest party founded by a 69-year-old comedian and led by a 31-year-old politician. Its anti-corruption, anti-establishment and, in particular, anti-poverty message has turned it into the tribune of Italy's downtrodden and destitute southern half. And while it's suspicious of the euro just as it's suspicious of every expert-approved thing, including vaccines, it isn't virulently so. But the League is. The more say it has, then, the more trouble the euro is in.
It wouldn't take much to put the common currency in mortal peril. Just running a bigger deficit would do it. That's because countries that can't print their own money can be subject to self-fulfilling panics — their borrowing costs go up because it looks as if they might default, and it looks as if they might default because their borrowing costs are up — that only the infinite resources of a central bank can tame. The European Central Bank, for its part, has promised to provide this type of backstop, but to get the inflation-phobic Germans to sign off on it, it had to attach strict conditions to it. Specifically, countries have to be adhering to the euro zone's budgetary strictures or else agree to an austerity program if they want the ECB to be allowed to buy their bonds.
That means the League, with its plan to flout these rules, is really promising to raise the country's borrowing costs. Which, with the turmoil of the last few days, has actually already been happening. To give you an idea of how crazy it's been, investors have been charging Italy about as much to borrow for two years as they have been for Spain to borrow for 30 years. At that rate, it wouldn't be long before the new populist government would have to choose between defaulting on its electoral promises or defaulting on the country's debt — or, more to the point, leaving the euro so it could print all the money it needed and wouldn't need to do either.
But there's a simple reason, beyond even the League's ambitions, why Italy really might leave the euro, even though doing so would force a lot of losses on its own people and banks. That's the fact that its economy has forgotten how to grow. It almost defies belief, but, even after you adjust for its aging population, Italy's gross domestic product hasn't even increased 20 percent since 1990 and not at all since 2003.
As a point of comparison, Japan, which is still unfairly considered an economic laggard despite the fact that it has almost entirely made up for its lost decade, has grown more than twice as much during this time. Even more staggering is that it was barely ahead of Italy as recently as 2o09. Since then, though, Japan's GDP per working-age adult has increased by 26 percent, while Italy's has barely eked out a 1 percent gain.
On the one hand, it's true that a lot of this has nothing to do with the euro. Italy has long had an oversize small-business sector that's grossly inefficient because it's so slow to adapt to new technologies. As historian Tony Judt pointed out in the book "Postwar," Italy had only 118 superstores in 1993 at the same time that France had more than 8,000.
But it's also true that the euro has made solving these other problems harder than it needed to be. It's already enough of a challenge to take on entrenched interests during the good times, but what if there aren't any? Desperate people will resist these kind of "structural reforms" even more than they otherwise would. And, as former IMF official and current Princeton professor Ashoka Mody shows in his new book "Euro Tragedy," the common currency has pushed plenty of Italians into a state of desperation with the way it's kept the country's inflation-adjusted borrowing costs higher than its neighbors'.
There's only so long you can tell people to wait for Godot before they run out of patience and turn to whoever is around. So it's no surprise that, after 15 years of nonexistent growth, Italy's populists aren't just knocking on power's door, but have now burst on through. The only shock is that it hasn't happened before. The bad news for Italy, though, is that its economic problems are so deep-seated, particularly its north-south divide, that nothing short of its own Marshall Plan could do anything about — and leaving the euro would be so traumatic that things might be pretty bleak for it no matter what it does. Not that that would stop it from scapegoating the common currency.
But the worse news for Europe is that acting as though populists aren't allowed to win elections on their own terms will only help them win more of them. Not that that will matter if Italy leaves the euro. That's because what might have been a barely containable crisis in Greece is an existential one in Italy. Its economy is so much larger that it's at once too big to fail and too big to save. If it does default, the reverberations could drag down banks and economies across the rest of the euro zone — potentially pushing others out, too.
It might turn out that currencies fall apart, too. The center cannot hold, and it is not holding.
Correction: An earlier version of this post misspelled Paolo Savona's name.