Italian Prime Minister Matteo Renzi, who will hold the presidency of the Council of the European Union through the end of this year, has big plans to promote economic growth and ease the austerity that he feels has weighed excessively on Europe. To succeed, he will first have to demonstrate an ability to push through reforms at home.
Renzi is unusually well equipped to try to challenge Europe’s conventional economic thinking. He is popular, with refreshing energy, vision and steadfast determination. He has taken risks with some of his early governmental appointments, and he has shown an impressive willingness to shake up the political scene, both at the national and EU level.
Last month, Renzi complained that the EU behaved like a “boring old aunt.” Last week, he warned Jens Weidmann, the president of the German Bundesbank, that he and his central bank colleagues should refrain from intervening on budgetary issues.
The economic logic is on Renzi's side. Having overcome the immediate financial stabilization challenges, Europe needs quickly to convert recent market gains into more durable economic accomplishments. To do so, it must reinvigorate its growth and employment engines. Without that, the beneficial impact of anything else it does will be undermined by joblessness, growing inequality and a weakening social contract.
The question is whether Renzi can avoid the fate of his predecessors, in Italy and other European countries, who have made similar efforts only to be dismissed by greater European powers. It doesn't help that Renzi comes from a “peripheral” European country whose homegrown combination of excessive indebtedness and low growth, together with some remarkable political dysfunction in the past, have made it vulnerable to economic malaise. Just two years ago, Italy needed the exceptional intervention of the European Central Bank to avoid financial calamity and economic implosion.
Renzi also faces some daunting institutional obstacles. First, the presidency of the EU Council has limited powers beyond defining the agenda for the summits it convenes. With his leadership rotating at the end of the year, Renzi will have to find creative ways to ensure that his policy reforms will stay in place.
Second, the success of anti-EU parties in the recent European Parliament elections have complicated the political landscape, increasing the amount of bargaining required to get anything done. The situation is made even more complex by the increasing alienation of the U.K., including the very public row over the appointment of Jean-Claude Juncker as the next president of the European Commission.
Third, the European superpowers, including Germany, have seen many peripheral leaders like Renzi come and go over the years. In view of the level of "bailout fatigue" among their constituents, and given their probable distaste for Renzi's very public demeanor, I suspect that some leaders of the “core” European economies will be tempted to simply wait out his presidency.
The best way for Renzi to overcome opposition is to prove that he can muster the same political will at home that he is asking of his European counterparts. The International Monetary Fund has identified the reforms needed to unlock Italy's growth potential: They include making the labor market more conducive to hiring, removing regulatory barriers that unduly hinder competition, improving the capacity of courts to enforce contracts, and requiring banks to better recognize their losses and recapitalize.
To gain the credibility he needs, Renzi must move quickly to put such reforms in place, rather than using his ambitious European initiative to distract attention from the even harder job he faces back in Rome.
To contact the writer of this article: Mohamed A. El-Erian at M.El-Erian@bloomberg.net.
To contact the editor responsible for this article: Mark Whitehouse at firstname.lastname@example.org.