The European Union will not unravel — only its German-dominated governance will change

  • There is no constituency strong enough to wreck the European project.
  • Germany's euro partners can force Berlin to change its economic policies.
  • The euro-denominated assets are sound investment choices.
German Chancellor Angela Merkel
Fabrizio Bensch | Reuters
German Chancellor Angela Merkel

Euroskeptics have no chance – not even Brexiters, or Italy's ascendant Five Star Movement and League parties.

The idea of a united Europe is a centuries-old dream come true. It has survived massive butcheries perpetrated by Charlemagne, Napoleon and Hitler who — in their own different ways — thought they could unite and dominate the continent through fire, terror and untold crimes.

The British joined the European common market — a fledgling free-trade area — in the early 1970s, because that's all they wanted. They voted to leave when, after decades of slippages toward an increasingly federal structure, they realized they did not want to board up the Palace of Westminster in rampant sovereignty transfers to the EU Commission.

But London is now fighting to remain part of the EU's genuine free-trade area (i.e., the single market) — without telling the British people about political implications of an arrangement guaranteeing the free movement of goods, services and factors of production.

Italy is a very different case. Rome's EU membership was enthusiastically enshrined in a treaty solemnly celebrated on the Capitoline Hill — hence the Treaty of Rome — in March 1957. Ever since, a country that formally reunited itself during a period of nearly 60 years in the 19th century, has been one of the staunchest supporters of the European project.

Italians mismanaged their economy

That is still the case. Correctly reading the mood of the Italians, the country's President Sergio Mattarella told a few weeks ago the leaders of the Five Star Movement and the League not to come back to him for approval of a government advocating Italy's exit from the EU and the euro area.

They did not listen, came up with the wrong people and Mattarella sent them packing. Ultimately, they had to present a new government to pass the president's EU screening test.

Mattarella knew that the idea of leaving the EU was one of those Italian political jokes that Germans take seriously. Indeed, anybody who knows anything about Italy also knows that the Italian people, and Italy's political establishment of all stripes, are not against the European Union. No, they are only emphatically against — what they apparently believe — is a union run by Germany on German terms.

That's an unfortunate — and fundamentally incorrect — view of how things really stand, and how they should be. It is a ploy to hide the sad truth that Italian politicians have gravely mismanaged their economy. Germany had relatively little to do with that.

Here are a few things to think about.

First, Italy's unreformed and unaffordable welfare state has led to calamitous public sector accounts. The country's gross public debt stood at 155 percent of GDP at the end of last year, which compares with the euro area average of 105 percent of GDP. It has a budget deficit of 2.3 percent of GDP — nearly three times the euro area's average of 0.9 percent.

Even with historically low credit costs, Italy's interest charges on public debt now account for 3.6 percent of GDP, the highest in the industrialized world and double the euro area's average of 1.7 percent of GDP.

Second, that leaves no space for tax cuts or higher public spending to create a policy mix with easy credit conditions that would support stronger economic growth and employment creation. Italy's government spending of 48.9 percent of GDP still stands above the euro area's average of 47 percent of GDP.

Third, to keep its huge public debt on a declining path — toward the euro area mandated objective of 60 percent of GDP — Italy must run large and steady surpluses on its primary budget balances (i.e., budget before interest charges on public debt). These surpluses have now come down to 2.2 percent of GDP from an average of 4 percent during the period from 2012 to 2015.

Push Germany to change its economic policy

Fourth, to argue, as the new government does, that Italy can grow its way out of this fiscal bind is to believe the fairy tales told by five star comedians.

Italy must bear down on its budget deficits and keep trimming unaffordable public spending.

As a result of that, Rome can only get a sustainable support to growth from easy money and exports.

Germans will keep screaming about the negative real short-term interest rates, but the European Central Bank will maintain accommodative policies as long as the euro area's core inflation rate of about 1 percent remains far below the medium-term target of 2 percent.

On exports, Italians would have to pick a fight with Germany — a country that is making a mint off its EU trade partners. As President Donald Trump would say: That should be an easy win.

Germany is clearly going overboard on that one. This year, Berlin expects a whopping current account surplus of $340 billion, or 8.3 percent of GDP.

That could be an opening salvo in Italy's attempt to chip at German-dominated EU policies.

But let's cut Germany some slack.

France, Italy and the rest of the euro area don't have to put up with German policies that are robbing them of their growth and employment. They can force Germany to change its ways — without waiting for Trump to read the riot act to free-trade abusers and inveterate trade surplus artists.

Italy also did not have to sign on to euro area rules it could not live by. Decisions are taken in a unanimous vote. Italy should have simply vetoed things it could not do, or taken a British-style opt-out.

It is, therefore, disingenuous to blame Germany for Italy's policy mistakes.

Investment thoughts

There is no constituency strong enough to wreck the EU's epochal project of a continent that is free, peaceful, united and prosperous.

Germany, France, Italy and Spain — 76 percent of the euro area — have particular responsibility to run a stable common currency as a pillar of a broader union to generate steady growth, high employment and price stability.

For that to happen, Germany must balance its intra-EU trade accounts to allow other countries to grow, create jobs and square their public finances. Germany now generates 65 percent of its trade surpluses on the back of other EU members. That cannot continue and Berlin seems willing to talk about it.

But Germany is now a sharply divided country in a sulking mood. The governing coalition is tearing itself up, and, to top it all off, a widely read and respected German news outlet ran this column on Friday: "Rage against the Germans. Nobody likes us — just why?"

A good place to start looking for an answer might be a lack of tact, empathy and comity in German dealings with other EU member states.

In spite of those difficulties, the European project remains on track. The euro-denominated assets are sound investment choices thanks to the ECB — arguably the best and the most useful institution the Europeans have created so far.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.