Who will flinch in a game of chicken between Italy and the EU?

Last week, the European Union Commission rejected the 2019 fiscal budget proposed by the new Italian government. The EUC’s vice president, Valdis Dombrovskis, argued that the commission, the bloc’s administrative body, had no alternative but to reject the budget. Italy’s proposed deficit — equal to 2.4 per cent of gross domestic product — is too large to guarantee the reduction in the ratio of debt to gross domestic product required by the amended Stability and Growth Pact, which regulates countries in the eurozone.

This decision has no immediate economic consequences, but it does have huge political ones. It marks a sharp increase in the political tension between Italy and the rest of Europe — tension that might even cause Italy to exit from the eurozone. This escalation is in the shortterm political interest of both sides, but it is against their longterm political and economic interests.

How is it possible that the Italy-Europe relationship has arrived at this low point? Italy is in a long-term economic decline. Its per capita income has been stagnant for about 25 years. Nearly 200,000 people, mostly young and highly educated, leave the country every year, an acute threat when combined with an aging population (with a strikingly high proportion of citizens aged 65 and over).

A large inherited debt burden makes it difficult to finance even basic infrastructure investments. Italy’s economic problems are mostly of its own making. But they are compounded by European Union rules (or lack of thereof ). Without a domestic central bank, the Italian treasuries market is prone to self-fulfilling panics. Italian banks, which do not have a reliable system of deposit insurance, face the risk of a similar panic. Following the 2008-09 crisis, Italy experienced a second painful recession in 2011-13, entirely driven by these risks, which are outside its control.

Exasperated by stagnant income and increased uncertainty, Italians overwhelmingly voted last March for two parties — the 5-Star Movement and the League — that promised change, especially in the relationship between Italy and the European Union. Italy’s EU partners, however, have shown no interest in reshaping this relationship. Everyone sees the flaws of the current system. The problem is that it would be political suicide to be seen as granting Italy concessions. It’s not just budget issues; it also extends to immigration, for which Italy (and Greece) bear more than their share of the cost. This raises a question: The commission has bent budgetary rules before.

So why the intransigence towards the new Italian government? There are optimistic and cynical possibilities for the commission’s rejection. The optimistic one is that the commission had to intervene aggressively to save its reputation because the Italian government made a mockery of the budgetary process. The economic case for the larger Italian budget deficit seemed less like a good-faith argument and more like a deliberate provocation to create a casus belli with European officials. If this were the case, however, it would not make sense for the commission to fall for it.

The more cynical view is that the commission is playing a game of national politics, pitting one nation against another against another, even at the cost of the long-term well-being of the European Union. With President Emmanuel Macron of France and Chancellor Angela Merkel of Germany losing popularity at home, both leaders love to blame an external villain like the new Italian government. Merkel told a German newspaper that solidarity among eurozone members should not turn the union into a “debt union.”

Macron said Matteo Salvini, the leader of the League party, was right to see him as a “main opponent.” Merkel and Macron have certainly not been outdone by the new Italian government, which in turn loves to blame Europe for Italy’s problems. The real loser, in this scenario, is the hope of a functioning Europe. If the unelected European commissioners care about the future of Europe as much as they proclaim, they should make every effort to engage the Italian government in a sensible budget plan that finds a balance between preventing the debt from exploding with the demands the Italian population has made on its government.

The best way to prevent the worst form of populism from spreading — which is in the interests of both the European Union commissioners and Italian citizens — is recognising and addressing the legitimate grievances that a large fraction of the population has voiced in electing this new Italian government. One of the lessons we learned from 1930s Germany is what happens when an intransigent group of nations tries to humiliate a prostrated borrower country for petty national politics. It would be an unforgivable tragedy if the European Union were to repeat the same mistake with Italy today.