Italy’s Election Troubles—There Is Worse to Come

    Scott B. MacDonald

    Politics, Economics, Europe

    Italy's Prime Minister-designate Giuseppe Conte leaves after a meeting with the Italian President Sergio Mattarella at the Quirinal Palace in Rome, Italy, May 27, 2018. REUTERS/Alessandro Bianchi

    There is a strong chance that the results of the next Italian election will take Europe into a greater crisis, probably of its own making.

    Italian politics marched deeper into uncertainty at the end of May 2018.

    Although Italy’s President Sergio Mattarella gave the Five Star Movement-League alliance the green light to form a government under law professor Giuseppe Conte, the head of state balked on the government-in-waiting’s selection of Paolo Savona, a well-known 82-year old Eurosceptic economist, as finance minister. Savona has in the past stated that Italy’s entry into the euro was a “historic mistake.” This situation leaves the European Union’s third largest economy, and one of the world’s largest debtors, in political limbo until the next elections are held. Considering the new rash of political uncertainty in Spain, the challenged nature of economic reforms in France, increasing potential for a trade war between the EU and the United States, and a messy Brexit situation in the United Kingdom—as well as an economic crisis and elections in Turkey—Italy’s problems inject greater angst over Europe’s overall direction. And the Italian political drama will probably get worse before it gets better.

    Mattarella is pro-EU ,and had made it very clear to the Five Star and League leadership that he would not tolerate a new government which would move to pull the country out of the Eurozone or disrupt the relationship. Indeed, Mattarella’s decision was made as he believed that Savona’s appointment would put Italy’s ties to the EU at risk , triggering further sell-offs of Italian assets in global markets. Considering that Italy’s debt-to-GDP ratio stands at 132 percent of GDP, and that the government needs ongoing access to financial markets to rollover its debt, further devaluation of Italian assets is not in the country’s national interests.

    The problem for many foreign and domestic Italian investors is that the Five Star-League alliance offered up a government that was anti-establishment, anti-euro and anti-immigrant. It also favored public sector debt forgiveness, tax cuts and greater social benefits. Along these lines, both the Five Star Movement and the League believe that it is time to throw off EU (and German) imposed fiscal austerity and let the economy expand. In a country where GDP growth has lagged the rest of Europe for over a decade, and where unemployment remains stubbornly over 10 percent, there is an appeal for government spending to stimulate economic expansion.

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