Italy’s marriage of convenience sours

Italy’s government is celebrating their first year in office, although the mood in Rome looks anything but celebratory. The recent European Parliamentary elections made plain what has become starkly apparent since the turn of the year – Matteo Salvini’s popularity is on the rise, and his fellow Deputy Prime Minister, Luigi Di Maio, is very much on the wane. With the European Commission and Rome currently at odds over Italy’s budgetary spending, and Prime Minister Giuseppe Conte threatening to quit unless the coalition partners cease their squabbling, Italy has had no shortage of political drama in the past few weeks. However, this may simply be a harbinger of what Is to come, with economic indicators remaining relatively flat, and the political sentiment being less than positive.

On the political front, Matteo Salvini and the League have been on the rise since at least the turn of this year, with polling indicating that they obtain somewhere around 35% of the support of the Italian electorate. In fact, in last week’s MEP elections, Salvini’s party won 29 seats, with just 14 seats going to his coalition partners, the 5 Star Movement. If an election were to be held tomorrow, there is little doubt that Salvini would come out on top. However, an election cannot be called unless President Mattarella decides that it is necessary. Given that he was less than enthusiastic about the populist/right-wing pairing to begin with, it is difficult to see what level of political chaos he would be willing to tolerate to avoid a new government headed by Salvini.

Earlier this week, Salvini insisted that he did not wish to bring down the government, but that the government should push through reforms with more urgency, something which was echoed by Prime Minister Conte. However, Salvini is also not naïve. He realises that with the level of support he currently enjoys, he can bide his time, and wait for the right opportunity to press for his claim to the keys of the Prime Minister’s office. PM Conte has voiced his exasperation with the infighting between the coalition partners and threatened to resign unless they sought to work together to implement the government’s mandated vision. But even Conte will know, deep down, that this government was a marriage of convenience for two parties who needed each other, but not necessarily liked one another.

This Italy’s 66th government since the Second World War, and it would be surprising if by the end of 2020 we aren’t staring down the barrel at the 67th. According to some analysis by JP Morgan, they expect that the current government is likely to fall by the end of July, with new elections being called for by the end of September. Although Italy’s government has been dysfunctional of late, this may be somewhat premature. I have the feeling that this government will hobble on to the end of the year, but would expect that on the current state of affairs, the coalition government may irrevocably fracture by the end of Q3 2019, and finally split off shortly after.

From an economic perspective, things have not been all that positive either. Whilst Italy has emerged from a small recession, its economic fundamentals remain weak, with high unemployment, the second highest level of government debt as a percentage of GDP in the euro zone (and one of the highest in the world), along with a budgetary deficit that has come under fire on numerous occasions by the European Commission since last winter. The Italian Economy Minister Giovanni Tria has insisted that his country has no intention of a showdown with authorities in Brussels, and that they would seek dialogue. However, with Matteo Salvini emboldened by his electoral victory it the EP elections, and insisting that the EU’s budgetary rules are outdated, it may be difficult to foster good will with European authorities, and a common purpose within the governing coalition to reach any form of negotiated settlement on Italy’s budgetary spending. Italy’s public debt reached 132.2% of GDP in 2018, up from 131.4% in 2017, with the European Commission expecting it to increase further for 2019 & 2020. Efforts to tackle Italy’s anaemic economic growth, high unemployment (which includes youth unemployment) and debt burden have failed in recent years due in part to political instability and the difficulty in passing the necessary reforms which would allow more flexibility in the private sector, along with the removal of the vast bureaucracy which is blamed for impeding investment.

Italians, like others in Europe, have shown that they are unhappy with the status quo, with much of the blame being put on the European Union and their stringent rules along with the growing aversion to waves of immigrants landing on Italian shores in recent years.  Matteo Salvini was cunning enough to read the national mood, and tap into this discontent, which has propelled his party to the top of the polls. The Prime Minister’s office is his to lose, at this point, providing he continues to appeal to public sentiment.

But Italy’s problems are deeper, and the reforms which Salvini proposes, which include flat taxes and reduce the tax burden on the upper classes will only add to Italy’s debt problems in the short term, with no guarantee the hoped-for economic benefits will materialise. This will put Rome on a collision course with Brussels, which is exactly where Salvini feels he thrives the most. The Five Star Movement are slowly sliding into obscurity, unless they can recapture the imagination of Italians, but it may already be too late. On current evidence, Salvini is poised to be Italy’s next Prime Minister, and he may be the most powerful one they will have had since Silvio Berlusconi. On paper, Italy will benefit from having a powerful leader who is able to push through reforms, but Salvini has not shown the economic acumen and political will to push through the actual reforms Italy needs most. Italy’s future may be murky, but Salvini’s is certainly bright.