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Feb 27, 2013 | 15:09 GMT

Italian Elections Show Emerging Challenge to German Leadership

Italian Elections Show Emerging Challenge to German Leadership
ANDREAS SOLARO/AFP/Getty Images
Summary

Renewed political uncertainty in Italy is threatening to rekindle instability in the eurozone, just as the currency union was showing signs of improving financial stability. Already, Italy's crisis is creating unease in Germany.

During a campaign event Feb. 26, Peer Steinbrueck, the German Social Democratic Party's candidate for chancellor, said Italy's political instability could become a greater problem for the eurozone. He referred to Italy's Five Star Movement leader Beppe Grillo and People of Freedom party leader Silvio Berlusconi as populists and clowns. Several members of German Chancellor Angela Merkel's coalition this week called on Italian parties to restore stability and continue with the reforms undertaken by outgoing Prime Minister Mario Monti.
 
Germany’s concern is mostly political: The electoral success of Italy's Five Star Movement, which criticizes the ruling elite and rejects Germany's leadership of the European Union, could be replicated by other parties in Europe. Italy’s instability could also put Berlin in the challenging position of providing political and financial assistance to a country that has voted against the austerity measures designed by the European Union and supported by Germany. This could harm Merkel’s bid for re-election later this year. Finally, Germany faces the risk that members of the eurozone — especially from the periphery — may become more vocal in their criticism of Berlin’s leadership. 

Germany's leaders are closely following the political situation in Italy. Instability in Italy could spur an increase in borrowing costs for numerous eurozone countries. This is of particular concern for Spain, which received a bailout for its banks in 2012 but managed to avoid requesting a sovereign bailout. In recent months, Madrid has dealt with high but tolerable borrowing costs. The Spanish government now fears Italy's political upheaval could put Madrid squarely back at the center of Europe's financial crisis. 

Eurozone countries under market pressure have followed Germany’s strategy so far. Even when opposition governments have taken power in place of administrations toppled as a result of the crisis, they have implemented unpopular reforms in return for financial aid. The outcome of Italian elections may well change that dynamic and force Germany to be more accommodating toward troubled countries in order to preserve the eurozone.
 
Germany’s main source of unease regarding Italian elections is therefore political, not financial. The strong electoral performance of the Five Star Movement, as well as Silvio Berlusconi’s rally in the polls (based largely on his vocal opposition to the German leadership leading up to the elections), likely alarmed Berlin. While Germany has dealt with Berlusconi in the past, the Five Star Movement is a new element. Grillo, the movement's leader, focused his campaign on criticism of the Italian ruling elite and the government's austerity policies. Grillo also questioned Germany's leadership throughout the European crisis and suggested that Italy could leave the eurozone. Grillo’s electoral performance made it evident that an anti-system political platform can be electorally successful in a country mired in recession and rising unemployment.
 

Maturing Threats to the Status Quo

German fears are twofold. On one hand, Berlin worries Italy may abandon austerity and break the alignment with Brussels that marked Monti's technocratic government. Germany fears that Italy may align more strongly with France — and potentially with Spain — in an effort to lighten austerity policies and seek alternative approaches to the European crisis.
 
On the other hand, the vocal discussions over the fundamental causes of the European crisis have also sowed fear in Berlin. The euro binds 17 countries with different levels of economic development and competitiveness. The creation of the common currency boosted German exports and consolidated Germany's position as the leading economic power in Europe. At issue now is who will bear the burden of mitigating Europe's crisis: the Continent's periphery through austerity, or its center, most notably Germany, through permanent financing of the eurozone.
 
This question, considered to be off-limits just a few years ago, is now openly being asked by anti-system parties with concrete possibilities of accessing power. The question was raised by the Syriza party in Greece last year and by the Five Star Movement in Italy this year, and it will be asked by many emerging parties elsewhere in the eurozone. So far, traditional parties have only timidly approached the question of Germany's leadership of the crisis. As fringe parties become part of the mainstream, so will rejection of the European status quo.
 
This changing dynamic could have large domestic repercussions in Germany. The renewed instability in Italy comes at an inopportune time for Merkel’s government. Germany will hold general elections in September, and Merkel does not want the return of political and economic instability in Europe to jeopardize her re-election. So far, German voters have appreciated Merkel’s strategy of strictly demanding more reforms and centralized oversight from recipient countries in return for aid. A renewed flare-up of the financial crisis because of the instability in Italy could place doubt on Merkel’s European strategy. Should pressure mount, which depends on markets and on how the political situation in Italy plays out, Merkel would likely become more accepting of possible intervention by the European Central Bank, since this wouldn't directly involve German taxpayers' money. However, even that alternative could prove unpopular at home.
 
The Italian crisis not only threatens to return instability to the eurozone, but it also shows that Germany’s efforts to ensure new governments align with Berlin’s strategy are becoming increasingly difficult. Over the coming months, Berlin will seek to argue that countries are not applying reforms at Germany's behest, but because investors’ trust has to be regained. Market pressure, in the form of downgrades by rating agencies and rising borrowing costs, would therefore to a certain extent aid Berlin’s argument and force peripheral countries to apply reforms, independent of Germany’s position.
  
Whoever leads Germany will face a dilemma. Domestic voters appreciate Berlin taking on a leadership role in shaping the European Union’s future and forcing through structural changes in other countries. On the other hand, Germany’s image as the leader of crisis management efforts could be risky since it could deepen the political crisis in other countries and solidify the resistance against Germany’s strategy — just as the recent Italian elections showed.
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