Italy Takes a Step Back From Europe

Italy Takes a Step Back From Europe

Thursday, 8 March, 2018 - 06:15
There are two ways to look at Sunday’s Italian general election results.

One is simply to focus on the arithmetic. From that perspective, the outcome is really not that different from what was expected. There was no outright winner: Neither the center-right coalition, nor the center-left nor the anti-establishment Five Star Movement managed to win a majority of seats. The vote produced a hung parliament, which will make it very hard to form a government, let alone a stable one. That means a period of instability lies ahead — though one could say this is merely the norm for Italy.

And yet the simple arithmetic doesn’t really tell the story of Sunday’s dramatic result. This was an anti-establishment triumph of the same magnitude as the Brexit referendum or Donald Trump’s U.S. election victory. Two populist forces are on course together to secure around half the votes. Five Star looks set to be by far the largest party in Italy, polling well above 30 percent. Within the center-right bloc, the League is the dominant party, above Silvio Berlusconi’s Forza Italia.

The Five Star Movement and the League are different beasts, but they share many traits. They have both been critical of the euro — though Five Star has recently toned down its rhetoric. They have also been skeptical of Italy’s approach to immigration, which has been to rescue refugees coming from the Mediterranean Sea. Most worryingly, they have been open-minded about claims that vaccinations are dangerous — a symptom of a broader skepticism towards science and “experts.”

The buzz in Rome is whether the two parties could team up and form a euroskeptic alliance. This partnership would likely be able to form a government, though politically that would be difficult to sustain. The League is formally in a governing coalition with the center-right and is now in the driving seat: As the largest party, it can pick its favorite prime ministerial candidate. Five Star’s base is made of many left-wingers, who would be against an alliance with the League. In his first remarks after the vote, Matteo Salvini, leader of the League, said he was opposed to teaming up with Five Star.

But in a way, all of this is irrelevant. The bigger point is that a majority of voters have chosen to turn their back on the path Italy has taken since the height of the sovereign debt crisis. The technocratic government led by Mario Monti and the three administrations formed around the Democratic Party have shared one trait: They have all sought to modernize Italy’s economy — raising the pension age, passing labor-market reforms. They have also been broadly compliant with euro-zone rules. When they have sought exceptions — for both banking and fiscal matters — they have done so in agreement with European institutions.

The Five Star Movement and the League don’t want to hear any of that. Their programs include generous giveaways, such as a universal basic income (Five Star) or a flat tax (League), or lowering the pension age (both), none of which Italy can afford without deep spending cuts. In short, they want to bust the European fiscal rules, claiming Italy needs a stimulus now. Some — particularly within the League — are ready to leave the euro to win the right to spend more.

This poses a major dilemma for the rest of the euro zone — ironically, just as a window of opportunity for reforming the currency bloc was opening. French President Emmanuel Macron was waiting for a new administration in Berlin (approved on Sunday) to test his ideas on greater risk-sharing between euro-zone member states in exchange for a stricter management of the public finances. The popular sentiment which came out of Italy’s election is a challenge to this compromise.

Germany and France can react in two ways. They can pause the process of further integration, given that it is unlikely to be greeted with enthusiasm south of the Alps. Alternatively, they can treat Italy as a problem child, steam ahead with their preferred solution, and then ask whoever is in Rome to sign up to whatever they have agreed. One thing is clear: Italy will play little role in designing the new rules.

For the anti-establishment parties that are rejoicing today, this will be a real test. So far, they have sold the electorate a future made up of free money. However, reality is much harder. They may not like European rules, but for now they have to work within them. As for leaving the euro, that’s much easier said than done. The risk is that they will end up like Greece’s Alexis Tsipras: turning their backs on the promises they have made because the alternative would be disastrous.

A period of great uncertainty lies ahead, for both Italy and the EU. Italian voters have spoken. What they have said is confused; not at all the message Italy’s euro zone partners wanted to hear.

Bloomberg

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