** Italy, Germany and France Meet on an Aircraft Carrier

By George Friedman 

Aug. 24, 2016 

The EU leaders tried to project unity, despite Italy’s economic malaise. 

German Chancellor Angela Merkel, French President François Hollande and Italian Prime Minister Matteo Renzi met yesterday on the Italian aircraft carrier Giuseppe Garibaldi. The announced purpose was to discuss European policy after Brexit. The real discussion was about Italy’s economy and the steps needed to revive it after a long period of stagnation, which continued through last quarter. 

Italian Prime Minister Matteo Renzi, flanked by German Chancellor Angela Merkel (R) and French President Francois Hollande (L), gestures as he delivers a speech on Aug. 22, 2016 during a joint press conference held aboard the Garibaldi aircraft carrier on the harbor of the Italian island Ventotene. 

Before getting to the economic discussion, it is interesting that they chose to have the meeting on an Italian aircraft carrier – a more military location than Europeans normally prefer. The choice is even more interesting after a leak to German media suggested that Germany is considering resuming the military draft. The United States, and not only Donald Trump, has been increasingly critical of Europeans’ contribution to NATO. The European Union’s GDP is larger than that of the United States, but their collective contribution to their own defense is a fraction of the United States’. In addition, the limited capabilities of Europe’s militaries make the Europeans dependent on the Americans, so nations with significant security issues must accommodate the U.S., reducing Europe’s coherence.

Holding the meeting on the Garibaldi drove home the point that Europe has some defense capability. But it also underscores how without Britain, the EU’s military power is diminished, if only on paper, since the EU does not have a united defense capability outside of NATO. It was a good place to have a meeting at a time when European unity is in question, with Italy as a weak link.

Italy’s economy is weak. There is no growth. The banking system is in bad shape. Unemployment is high. There is substantial public unrest, and Renzi’s standing is weakening. Italy has been living somewhere between recession and stagnation since 2008, and after eight years, there is no sign that the situation is going to end.

The Italians want to run a substantial budget deficit to stimulate the economy. The EU operates under a “stability pact,” which requires deficits to be kept within certain limits, but allows for exceptions. One exception has been France, which has been operating outside the boundaries of the stability pact for years. Spain and Portugal were recently given exceptions as well. As Merkel put it, “The stability pact has a lot of flexibility, which we have to apply in a smart way.”

I am not sure what “a smart way” looks like, but the issue does not apply to Italy. Renzi said, “Italy’s deficit has been at the lowest level of the last ten years.” He said that he “would go ahead with structural reforms and deficit reductions for the good of [Italy’s] children and grandchildren.” In other words, Renzi said that he would further tighten spending. Merkel called his stance “courageous.” Hollande mentioned that the U.K.’s decision to leave the EU at some point in the future “requires a response by EU leaders.” Merkel agreed that they need to “deliver results.” She was not clear on what those results would be.

It is difficult to understand Renzi’s move. Increased austerity has not worked in eight years. Accepting that Renzi is not insane, it is difficult to understand why he thinks this move will work any time soon. Merkel conceded that these actions “won’t show results in four weeks, but it sets the parameters for a sustainable and successful Italy.” No one expects it to work in four weeks, but the question is why it should work at all.

Two things emerge from this. One is that the Germans and French are going to use the Brexit that has not happened as an explanation of why increased austerity is needed. It is not clear to me how Brexit leads to austerity, but Merkel seemed to be saying that. Second, Merkel let it be known that while it is not up to Germany, the European Commission might be more flexible to accommodate Renzi. That is obviously an option, given the way France, Spain and Portugal have been treated.

But given the strategy Renzi is proposing, there is hardly a need for the commission to be accommodating. Renzi, who was seen as a maverick in Europe, is now being more austere than is required. If Merkel is congratulating you, then she has gotten everything she wants.

Part of this might be political gamesmanship. Renzi needs a victory. One way to get it is to propose deep austerity and then demand concessions from the EU Commission. Once granted, he can be hailed as a tough negotiator. The problem is that he would be bargaining against his own budget. But politics is strange enough that he might pull it off. An alternative is that he knows he will need EU help on Italy’s banks and by conceding this point, he is setting up an EU concession on the banks. That is pure guesswork, as there wasn’t a hint of it in the talks.

In either case, the budget, mandated as it is by the EU, will be extremely unpopular, imposing several more years of austerity. Inevitably, it will generate an exit movement, with proponents arguing that the only reason Italy has these problems is an EU-imposed austerity, and that the faster they get out of the EU the better. For all I know, maverick Renzi lives, and he is doing this to trigger this movement. But whether or not he favors leaving the EU, there will be a movement as a result of this budget.

The argument for staying in the EU will be that Italy can’t get better without the EU. The argument for leaving the union will be that Italy will never get better if it stays. In any case, the malaise that has gripped Italy for years will continue, and it is important not to expect solutions in four weeks. The problem Merkel has with European unity is that after eight years, no one expects an improvement in four weeks. The question is whether this is the permanent condition of Europe. Perhaps this is the best Italy will do for a long time, including children and grandchildren.

The scene on board the Garibaldi was designed to remind everyone that Europe is not without military power and to legitimize European unity in the face of Britain’s decision to leave. But it is not clear whether the Italian public will applaud or demand that the Garibaldi be sold. It isn’t clear that Italy will choose to leave by any means. But it is clear that the Italian economic crisis, of which the banks are simply a symptom, is not on its way to clearing up.