Italy narrowly avoided another election.
The centre-left Democratic Party and anti-establishment 5-Stars Movement came together to reinstate Giuseppe Conte and keep Italy politically stable. A new cabinet was sworn in last week, on September 5th, and it seems that this time around, Italy plans to bury the hatchet with Europe and leave euroscepticism behind.
The cabinet is a thorough mix of both parties. 5-Star Movement party leader Luigi Di Maio will no longer operate as deputy prime minister but will take on the role of foreign minister. Meanwhile, Matteo Salvini, head of the League, is no longer the deputy prime minister, nor the interior minister. Instead, Luciana Lamorgese, former prefect of Milan, is taking over as interior minister.
The new government has been jokingly nicknamed MaZinga, named for a Japanese anime series that was popular in Italy in the 1970s, and also doubles as a portmanteau of the last names of Di Maio and Democratic Party leader Nicola Zingaretti, who joined forces to oust Salvini and avert snap elections. Of the 21 total ministers, seven are women, ten are from 5-Stars, nine are Democrats, and the Health Minister, Roberto Speranza, represents the Free and Equal party.
“We know very well that the parties which make up this coalition have had major clashes over the years. It is a difficult road ahead, but what matters is the spirit”, said Dario Franceschini, a Democratic Party member and now, the new Culture Minister. “There was a climate of willingness and cooperation”, he added after an initial cabinet meeting.
Enzo Amendola takes his place as Minister of European Affairs, and Roberto Gualtieri from the Democratic Party is stepping in to take charge of Italy’s economy and national debt. Gualtieri is well known in Brussels as he is also the Chairman of the European Parliament’s Committee on Economic and Monetary Affairs, as well as a member of the Brexit Steering Group. It is this cabinet appointment , more than any other, that shows Italy is keen on repairing its relationship with the EU.
“The eurozone now has a more reliable partner in Italy”, said Sven Giegold, a European lawmaker from the Green Party who worked with Gualtieri on the economic committee. “With Gualtieri, Germany and Italy can open a new chapter in euro policy.”
Paolo Magri, the director of the Italian Institute for International Political Studies in Milan, said that while he did not expect major shifts on Italian demands for additional financial flexibility, requests for more solidarity from Europe on migration is likely. “The need to force European rules when it comes to finances and migration exists, and will remain, because these issues won’t disappear tomorrow”, Magri said, adding that he expects less confrontation and more alliances.
“The new government is likely to be more responsible in economic terms than either the previous one, or a cabinet led by the League”, said Luigi Scazzieri, researcher for think-tank Center for European Reform. “While it has no appetite for fiscal tightening, and wants to change eurozone fiscal rules, it will be much less willing to pick a fight with the EU”, he added.
Financial markets have reacted well to the new government. Milan’s FTSE MIB is up by nearly 1.7 percent, and the spread between Italy’s bond yields and Germany’s also narrowed from 158 to 146, indicating investor confidence over the political outlook. Ten year yields hit a new record low of 0.803 percent on Wednesday; they were above 1.5 percent at the beginning of August.
“The formation of the new government ends the summer political crisis in Italy and gives short-term relief to investors”, said Matteo Germano, Head of Multi-Asset Investments at Amundi, Europe’s largest fund manager.
In a speech before parliament, re-instated Prime Minister Conte said, “We want to put behind us the din of useless declarations and belligerent, bombastic statements”, referring to the aggressive language often employed by Salvini and the League. “The language of this government will be mild-mannered.”
“I remain firmly convinced … that it is within the confines of the European Union and not outside, that we must work for the good of Italians”, he said.
Challenges Ahead
The current political alliances in Italy may not be as stable as Europe wishes.
Some question its longevity as the Democratic Party and 5-Stars regularly clash on a myriad of issues, such as migration and foreign policy. One example lies in the nature of Italy’s relationship with Russia or China; the Democratic Party aims to strengthen ties with Europe, while 5-Stars aspires to be friendly with China and Russia.
It is pertinent that both parties agree on a budget that passes parliament by the end of September, before being submitted to Brussels for approval by October 15th. The government needs to find over 20 billion euros in savings in order to remain compliant with EU rules and avoid a harsh rise in VAT, which, if implemented, would brutally affect the country’s poorest citizens, and could very well kick Italy back into a recession. The previous government butted heads with the EU over its spending plans, but the new conciliatory government may be more successful in winning concessions from the EU.
Italy’s debt stands at 2.3 billion euros – 132 percent of the GDP – and is the highest in the eurozone after Greece. The EU has heavily pushed Italy to slash its deficit and, simultaneously, its debt which has often led to clashes with the previous government and their spending priorities. Italy agreed to reduce its deficit to 2.04 percent of the GDP for this year instead of the initially planned 2.4 percent, which indicates that the 2020 budget may run into similar problems. The government is finding they may be trapped between raising taxes or slashing public spending – both of which are deeply unpopular moves.
The new government also aims to cut labour taxes, set a minimum wage, and review EU fiscal rules. It’s a tall order.
Giuliano Ferrara, a political commentator who has been critical of Italy’s populist parties, described the new coalition as a case of “well-meaning political prostitution to avert the implosion of democracy”.
“Governing will be trickier than agreeing a coalition”, Berenberg economist Florian Hense said in a note. “The upstart 5-Stars have been the bane of the established PD for the past six years. Conte’s ability to broker compromises between the parties will be even more crucial than it was for his previous coalition.” Addressing the budget, Hense added that the new government was “unlikely to implement the serious pro-growth structural reforms that Italy needs in the long run. But it probably will not make the situation worse”.
Beyond the economy, Italy must still reckon with very real problems that include high unemployment, mass populist dissatisfaction over immigration, and repairing the country’s ties with the EU.
The country briefly slipped into a recession in the second half of 2018, and has since remained stagnant. Growth this year is expected to be 0.1 percent, and government predictions are only mildly more optimistic at 0.2 percent. Many fear Italy may slip back into a recession again, and with slow growth in Europe overall – Italy cannot afford to rely on the strength of the eurozone.
While unemployment has been reduced, it still stands at 9.7 percent – higher than the eurozone average of 7.5. Youth unemployment sits at approximately 28 percent – almost double the European average of 15.4. In addition, 8.4 percent of Italians – more than 5 million people – live in poverty, with the majority residing in Southern Italy. Only a little more than 5 percent live in the more heavily industrialised north, meaning the government must invest in the south – a region which often bleeds workers who leave due to lack of opportunity and poor infrastructure, like failing roads, schools, and social services.
Rome will need a lot of flexibility and support from Brussels on these issues, which will undercut the populist strength of the League and help move 5-Stars in a more pro-Europe direction. Should Europe stand too firm, the bloc risks fanning the flames of Salvini’s fans.
“It would be very unwise for them to underestimate Salvini’s chances to come back and win big if new elections are held soon”, said Francesco Cherubini, professor of EU Law at Rome’s LUISS university. “It’s both in the EU and the Italian government’s interest to try to keep this honeymoon alive.”
Former Deputy Prime Minister Salvini has mocked the new government on social media, describing their chances for survival as “slim” and “short-lived”. He has also urged his supporters to protest in Rome on October 19th for a “day of Italian pride” as a stand against the new government.
“How can you go from a ministry with 150 pending company crises to a foreign ministry?” Salvini said on state TV broadcaster RAI, lambasting his former ally Di Maio.
“A government born between Paris and Berlin, and the fear of losing one’s seat”, Salvini said on Facebook. “They will not be able to escape the judgment of Italians for too long: we are ready, time is on our side, in the end we will win.”
As Europe – and the rest of the globe – looks on, Italy hopes its new government will usher in a sense of stability.
