Financial markets took a dive on Tuesday, in part because of investor worries that the world’s largest economy, the European Union, may sink if it fails to deal with red ink. For the first time in its history, EU leaders had to demand that a member state, Italy, cut its spending or face severe fines. Rome replied no.
The standoff spooked the markets. As Europe’s fourth-largest economy, Italy has the potential to bring down the 19-nation single currency, the euro. Its public debt is the third highest in the world. And its banks, shaky from owning too many government bonds, could trigger a new financial crisis in Europe.
On one side, a new left-right populist coalition in Rome insists on trying to revive a weak economy by hiking spending, such as a plan to give about $900 a month to poor families. The EU along with investors insists on spending cuts to show Italy can pay off its debts and not jeopardize the rest of Europe.
The contest of wills (and economic theories) could play out into December and perhaps influence European elections in May. Yet solutions offered by powerful examples could help end the political head-knocking between Brussels and Rome. Four other EU members that suffered greatly during the 2010-2014 eurozone crisis are now on the road to recovery and have a handle on their high debt.
The four are known as the “PIGS” – Portugal, Ireland, Greece, and Spain. Each had to muster the patience and stamina to accept austerity, new taxes, and other measures to achieve economic growth. They also came to appreciate the support of the EU’s single market and the euro, two achievements in postwar Europe that provide stability and prosperity.
The EU’s unprecedented rebuke of Italy’s budget and its demand for fiscal discipline show a confidence learned from the relative success of the PIGS. Europe’s increasing unity, although frayed by tensions with Britain, Poland, and others, relies on members learning from the best practices of others. A continent once at war must learn to keep the peace by sharing the highest ideals.