Could the new coalition in Italy work (at least for awhile)?

James Galbraith has an interesting article on the American Prospect website on the new coalition in Italy and its likely policies. Not sure if I buy his argument about the economics of what the coalition is likely to do but intriguing nonetheless.

"[Their] policies aren't ideal; they won't create the jobs or the physical
 renewal that Italy needs. But they can be put in place quite 
quickly. And they will bust the headlock of austerity—testing and 
probably demonstrating the power of fiscal expansion to generate economic
 growth, at least in the short run. They do not require, nor will they
 necessarily lead to, the abandonment of the euro. As Italian legal experts 
know, the fiscal compact and debt and deficit rules are not fixed treaty 
obligations; they are regulations—which have been interpreted loosely in 
other contexts. However, the parallel currency scheme can be transformed
if necessary into a euro-exit Plan B, leaving that possibility as an implicit threat in the Italian government's hands.



How will Brussels and Berlin react? So far, in comic denial. The EU
 budget commissioner declared that the markets would teach the Italians not
 to vote for populists, provoking a paroxysm of outrage. European Commission President Jean-Claude Juncker, a reliable buffoon, urged Italians to “work harder
and be less corrupt” (this from the former prime minister of that tax haven, Luxembourg). If Brussels and Berlin have actual weapons to deploy short of destroying themselves, a serious risk since they hold a large share of the Italian debts, they have yet to demonstrate what they are.

In this way the Greek drama of 2015 reappears under radically different 
conditions. Europe then refused to budge on minimalist policy demands; a
 Left government was to be subdued, nothing else. But Italy is ten times
larger than Greece, is a net contributor to the EU, is not under a memorandum, has a primary budget surplus which it can spend, a current account surplus as well, and a public debt which, however high, is not immediately problematic.
 And Italy saw what happened to Greece. So Europe now faces a government 
that probably cannot be subdued, in a country too big to fail. Italy may 
go forward with an economic plan that will be for a time more-or-less and 
comparatively successful, bringing benefits and popularity."

Stay tuned; should be a wild ride!

About this article

PROSPECT.ORG

The Fate of Italy and Europe

The far-right-mushy-centrist new government poses huge challenges to the continent—not least because in the short term, its economics may work.