Europe’s Energy Crisis Demands Realism, Not Fiscal Illusions
Italy’s debate over how to respond to the shock triggered by the Iran war risks drifting into political fantasy just as Europe faces a dangerous economic environment. A commentary by Ignazio Angeloni
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The debate in Italy over how to respond to the energy crisis triggered by the war in Iran is currently marked by a striking lack of realism — on both sides of the political spectrum. While some degree of distortion is inevitable in a pre-election phase, the fact remains that ignoring the underlying data and the limited set of available options risks making an already difficult situation even worse.
The opposition has used the breach of the public deficit target by one-tenth of a percentage point — first revealed by Istat in early April and confirmed by Eurostat later that month — as a pretext to attack the government’s entire fiscal policy.
That is a mistake.
The fact that the deficit ultimately stopped at 3.1 per cent rather than just below the threshold does nothing to diminish the achievement of economy minister Giancarlo Giorgetti, backed by prime minister Giorgia Meloni, in defending fiscal prudence over the past three and a half years, often against pressure from factions within their own governing coalition.
If in April — the month in which markets progressively realised that Italy would not exit the excessive deficit procedure — the spread on Italian government bonds remained broadly stable, it was entirely due to that prudence.
The opposition would do better to reflect on why the National Recovery and Resilience Plan (PNRR), launched under its own political sponsorship, failed to deliver, leaving Italy wearing the black jersey both for growth and debt. It should also reflect on the role its own policies played in producing the fiscal slippage, artificially boosting demand in 2022 while burdening the public finances in subsequent years.
There are legitimate criticisms that can be directed at this government: the composition of the budget, the absence of a genuine reform agenda, and its shared responsibility for the management of the PNRR during most of its implementation. But those criticisms do not concern the government’s efforts to keep the fiscal accounts under control — an area in which this administration has been more coherent and determined than its predecessors.
At the same time, some forces within the government appear determined to worsen the situation.
Their reaction oscillates between “we decide alone” — which would effectively mean excluding Italy from the new fiscal rules, something not permitted under the very framework the government itself signed and committed to respect — and “suspend the pact for everyone”, an equally unrealistic proposition given that the difficulties currently concern above all Italy, and largely for reasons of our own making.
Under such conditions, it is difficult to expect sympathy or alignment from European partners.
Until international conditions improve again — whenever that may be — the path ahead resembles an obstacle course far more than an open road. That requires proceeding more by exclusion than by free choice.
The most credible course, as far as one can tell, is the one chosen by the economy minister: finding, within the existing rules, a shared solution with Europe capable of softening the impact of the crisis on the Italian economy.
On this front, Brussels is likely to be receptive. For the European Commission, it is now a priority to demonstrate that the new fiscal framework works and does not collapse at the first serious shock. When the main objectives converge, a compromise can usually be found.
The challenge is to reconcile the three sides of the trilemma: protecting the most vulnerable parts of society, minimising the impact on the deficit, and avoiding the complete neutralisation of price signals on energy demand.
Italy can advance some legitimate arguments. For example, while fuel prices at the pump are currently lower in Italy than in Germany or France, this is no longer true when measured relative to consumer prices.
Yet the unpredictable nature of the international situation makes it impossible to ignore more adverse scenarios, in which the energy crisis intensifies with consequences for the entire European economy.
During last Thursday’s press conference, European Central Bank president Christine Lagarde carefully avoided answering questions about which of the “adverse scenarios” contained in the ECB’s latest forecasts most closely resembled reality. But two figures are enough to grasp the situation.
As international signals continue to deteriorate, energy prices have moved close to those underpinning the ECB’s worst-case scenario, in which European growth slows to only a few tenths of a percentage point.
A useful comparison is 2023, when euro area growth stalled at 0.4 per cent and inflation reached 5.4 per cent. At that time, the Stability Pact was still suspended.
Would those be the conditions under which a new suspension of the pact might become reasonable? It is not unrealistic to imagine such an outcome — even if it would not be wise for Italy to be the country raising the issue at this stage.
Behind all this lies the larger question of whether the current system of fiscal constraints remains suited to the world that has emerged after 2024.
Europe is now being forced by geopolitics to take control of its own destiny on every front, which inevitably requires greater room for manoeuvre not only in strategic policy but also in economic policy.
The Stability Pact was conceived — and repeatedly reformed — during a period in which Europe was deepening integration under a framework of external protections and rules that no longer exist.
Today Europe must stand on its own, in an environment where weakness and self-imposed limitations risk carrying a very high cost.
In such a world, a stronger Europe at the centre — and one less constrained by its own rigidities — may well become a necessity rather than a choice.be different. If that is the case, further rate adjustments will be unavoidable. Better to recognise it sooner rather than later.
A previous version of this article was published in the Italian daily Il Foglio
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
