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On Italys budget, confrontation is guaranteed

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LONDON — Over the summer, EU leaders scrambled to solve a crisis that didnt really exist.

The number of migrants coming into the bloc has been low compared to its high in 2015. German Interior Minister Horst Seehofers implicit threat to bring down Germanys “grand coalition” over the issue was never really credible.

Today, however, Europe is about to face a real crisis. And the way its leaders handled events during the migration scare will make it more difficult to resolve.

The most important development in Europe over the summer has been the fact that Matteo Salvini, the demagogic leader of Italys League party, has firmly established himself as the driver of the countrys new Euroskeptic government and the dominant force in Italian politics.

Salvini has made good use of his platform as interior minister to fan the flames of the migration “crisis” and then use it to control the domestic political and media agenda. His strategy has paid off handsomely. The Leagues historic election result of 17 percent in March has already been surpassed. It has gained more than 10 percentage points in the polls since then and has further bolstered its standing in a string of municipal elections.

The budget is likely to develop into a race to the bottom, with each party competing to implement its own, high-profile spending promises.

In comparison, the 5Star Movement, the coalitions other partner, has been eclipsed, forced to parrot the Leagues nationalistic rhetoric in a desperate attempt to limit the decline in its own support. But their leader, Luigi di Maio, has not been able to make an impact on migration. He has therefore focused on 5Stars economic agenda, notably its flagship universal income scheme. His hope is these generous spending plans will help the party win back public support.

This is where the roots of Europes real crisis lie.

The political debate has now shifted to fiscal policy, as Rome draws up its budget for 2019. This will give Salvini another opportunity for the League to score political points. He will not want to be outgunned by the 5Stars, especially as both parties have opposing economic priorities. The budget is therefore likely to develop into a race to the bottom, with each party competing to implement its own, high-profile spending promises.

Its true that Salvini has said he intends to respect the EUs rules — but several caveats are important.

Italian Interior Minister Matteo Salvini (left) with German Interior Minister Horst Seehofer | Andreas Gebert/Getty Images

The first is the scale of the governments program. If implemented in full, it would result in over €100 billion in higher spending or lower revenues — roughly 6 percent of GDP. Even if elements of the plan are watered down, as they likely will be, they will still blow up the eurozones fiscal rules.

The government has also been sneaky, focusing the domestic debate on the EUs 3 percent nominal target and signaling its willingness to stay below that. But that target is largely irrelevant for Italy.

The EUs rule book mandates that Italy significantly tighten its belt next year — to the tune of roughly €10 billion. Although these rules have been fudged in the past, there is very little room to do this again: The “flexibility” former Italian Prime Minister Matteo Renzi was able to negotiate with the EU was dependent upon Rome delivering €5 billion in savings this year. Zero seems more likely.

The last meeting of European leaders in June raised the stakes. There, Romes belligerent strategy — threatening to veto the entire proceedings — achieved some important, albeit limited, concessions. Its not a lesson that will be lost on Salvini. It will encourage him to adopt an equally confrontational stance on the budget.

Its true that Finance Minister Giovanna Tria has been more constructive, stressing the governments consensus against Italys exit from the eurozone and commitment to the currency unions fiscal rules, most recently last Friday in Vienna. But rather than fostering trust, Trias stance is nurturing suspicion.

Italy now has a “cake and eat it” government. It wants to keep the euro, but not abide by its rules.

In Brussels, Berlin and elsewhere, his interventions have come off as too manufactured. And if he is to be believed, why did the government appoint two prominent Euroskeptic League lawmakers — Alberto Bagnai and Claudio Borghi — to critical economic positions in parliament?

Tria and Prime Minister Giuseppe Conte also dont hold much sway over Di Maio and Salvini. As the budget now becomes the issue through which both parties vie for public support, a collision with the rest of Europe seems inevitable.

This summers politics over migrants has been a mess. But the imminent standoff between the EU and Italy over Romes budget plans will make it look like a stroll in the piazza. Italy now has a “cake and eat it” government. It wants to keep the euro, but not abide by its rules. That inherent contradiction is soon coming to a head. Its outcome is certainly not a foregone conclusion.

Mujtaba Rahman is the head of Eurasia Groups Europe practice.