Italy’s Political Problems Could Wrack the EU

    Scott B. MacDonald

    Security, Europe

    The Italian Freccie Tricolori aerobatics team perform prior the start of the Italian F1 Grand Prix in Monza, northern Italy September 6, 2015. REUTERS/Giampiero Sposito

    Italy has the potential to be the next big crisis to face Europe—and its new leadership knows it.

    Italy has finally formed a new government. The March 2018 elections left behind a radically different political landscape for Europe’s third largest economy, knocking out the pro-European center-left Democrats, with voters giving over 50 percent of their votes to two radically different parties, the Five Star Movement and League (and its allied parties). After over more than two months of negotiations, the duo have thrashed out their differences and agreed to form a government, taking Italy on a new path. Although there have been questions raised over the new alliance’s prime ministerial candidate, law professor Giuseppe Conte, the future direction of Italy—at least in the short term—will is the hands of the political outsiders.

    The Five Star and League do not easily align to the traditional political divide of right and left; rather they are populist, anti-establishment, anti-European Union, pro-Russia, and favor the loosening of the country’s fiscal restraints to achieve a faster pace of growth. They are also anti-immigration, the League more so than the Five Star. There is an expectation that an early policy initiative will be to tighten immigration. And both parties have a sizable core who favor taking Italy out of the Eurozone and seeking forgiveness of a portion of the country’s public sector debt. Italy’s debt is equal to 132 percent of GDP and, as such, it is a drag on economic growth.

    The probability of a Five Star-League government, with spending and tax cuts, as well as its stated rejection of EU budget rules has left European markets in a nervous condition and widened spreads between Italian and German sovereign bonds.

    The pending new government’s views have also stirred up other European governments, which have little interest in reliving the financial turmoil sparked by the Greek sovereign debt crisis from 2009 to 2012. The French finance minister Bruno Le Maire was quick to warn his new colleagues in Italy, stating, “If the new government took the risk of not respecting its commitments on debt, the deficit and the cleanup of banks, the financial stability of the entire euro zone will be threatened.”

    League leader Matteo Salvini promptly responded to the French finance minister, saying that the warning was “unacceptable” interference. He added, “I didn’t ask for votes . . . to continue on a path of poverty, precariousness and immigration: Italians first!”

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