ON ITALY´S POLITICAL CRISIS / GEOPOLITICAL FUTURES

On Italy’s Political Crisis

Even the most insulated places are worried about the global economy.

By: Antonia Colibasanu

While lecturing at a European summer school in Lombardy, Italy, about reconstructing Europe after crisis, I visited Premana. 

Near Lake Como, nestled in the mountains, it's one of the small towns where the road ends and the forest takes over. 

Premana is surrounded by pine and chestnut trees that rise from the bottom of the valley up to the high pastures used during the summer months. 

It is utterly isolated. 

The steep road to Premana doesn't link it to another town but instead terminates into the mountain.

This helps to explains the city’s history. 

The Celts settled it in 400 B.C., then it was taken over by the Romans, who were interested in its iron ore, which they would use to manufacture arms. 

During World War II, Premana was the primary base of operations for the Italian partisan resistance movement against fascist forces in the area. 

But as times change, one thing remains the same: Geography protects the Premanese from the outside. 

This has enabled them to become rather famous metalworkers. 

In antiquity, they made arms. 

In modernity, they make scissors, knives and all sorts of cutting tools.

But with iron and steel no longer produced locally – nor produced much in Europe, for that matter – local businesses depend on the global supply chain. 

When I visited the most important scissors maker in the area, the executives’ most pressing problem was the limited steel supply, along with increasing energy costs. 

This is not a situation unique to Premana, of course, but the brewing political crisis in Italy is bound to make things worse.

Populism

The collapse of Italy’s national unity government comes as the European Central Bank delivered its first interest rate hike in 11 years. 

Like other indebted eurozone states, Italy has tried to reduce its vulnerability to rising interest rates and market panic by making use of relatively cheap credit to rebuild its economy. 

Even in the comparatively wealthy region of nearby Lombardy, local businesses are taking advantage of the state’s subsidies program, which essentially relies on state indebtedness to finance their businesses.

The political crisis has everything to do with Italy’s economic problems. 

The most recent chapter began July 14, when the 5 Star Movement, a member of the ruling coalition, blocked the passage of a law meant to provide a framework for energy consumers dealing with spiraling costs. 

Party leader Giuseppe Conte held the bill hostage, asking for several political concessions from Prime Minister Mario Draghi in exchange for his party’s cooperation. 

Draghi demurred, and after nearly a week of political discussions, Italy's government crumbled on July 19. 

With the exception of the Democratic Party, all of Draghi's main coalition partners snubbed a confidence vote he had called to try to end divisions and renew their fractious alliance.

Even if Italy has managed to extend its debt maturities during the past few years, the average life of Italian debt, at around seven years, is still lower than it was in 2010 – and only marginally higher than in 2012, when the eurozone recovered from its debt crisis. 

This makes Italy relatively vulnerable, considering it hasn’t caught up yet to pre-pandemic/2011 crises levels, making it dependent on ECB policies and internal political stability. 

It is hard to say how much of a rise in borrowing costs Italy can handle in this environment.

The political crisis will, however, help populist parties in their campaign for the next elections. 

Populism and anti-establishment movements may be on the rise throughout Europe, but Italy has already had its fair share of them. 

If the socio-economic climate of the early 2010s gave these parties their start, the current climate will force them to get competitive. 

The 5 Star Movement, for example, had an impressive performance during the 2018 elections, as did the League.

These are the two biggest anti-establishment parties to have joined the Democratic Party and Forza Italia in a unity government under Draghi. 

However, in doing so they tarnished their hardline reputation by making the kinds of compromises coalition governance demands. 

And Brothers of Italy, a far-right anti-establishment party led by Giorgia Meloni that didn’t join the coalition, is reaping the benefits. 

Brothers of Italy barely made it into parliament in 2018 with just 4.3 percent of the votes, but it currently controls about 6 percent of seats, while boasting 22.8 percent support in the most recent poll. 

By comparison, the 5 Star Movement has dropped from 35.9 percent in the 2018 elections to 18 percent control of parliament, with 10.8 percent support in the polls. 

The League maintained a 20 percent control of parliament, but its public support dropped to 14 percent.

With the only two parties polling above 20 percent being anti-establishment Brothers of Italy and the center-left Democratic Party, it’s hard to see how the next election will stabilize the country in the long term, especially since there are so many pressing issues that parties cannot agree on, even in their own ranks. 

The League and the 5 Star Movement have been accused of supporting Russia’s policies in Europe, while Brothers of Italy has taken a strong pro-Ukraine stance despite its conservative position on other issues. 

Brothers of Italy is also broadly seen as euroskeptic but has tempered its views somewhat, as Italians seem to welcome EU pandemic recovery funds. 

Even so, it’s unlikely that Brothers of Italy will want to partner with the center-left Democratic Party, the only party that overtly holds pro-Western views.

Pessimism

There is, however, a chance that rushing to new elections could stabilize things in the short term. With Draghi’s Cabinet becoming increasingly fractious in light of the upcoming elections, there had been growing opposition to important reforms that had to be postponed. 

Before July 19, everything had to be postponed until May 2023; now, it all needs to be kept under control until late September. 

The caretaker government should be able to do that and work on the 2023 budget, which will have to be passed in the coming months. 

If nothing too serious shakes the global economy, Italy’s economy will remain relatively stable. 

And because the elections may not bring forth a clear governing coalition for a while, the caretaker government may hold its own until the new year.

Still, the people I talked to in Lombardy were pessimistic about the future. 

As Italy’s most profitable region – and therefore most important when it comes to tax collection – Lombardy hopes that the money coming from the EU’s pandemic recovery fund will keep coming. 

Italy is the biggest recipient of the fund, at 191 billion euros ($195 billion) in grants and loans. 

The first tranche of almost 25 billion euros was paid in May, but the second tranche is tied to a raft of reforms involving the economy and the justice system, as well as digital and green technologies. 

Many businesses saw the dispatch of the EU recovery funds as an opportunity for their operations to survive the complex economic challenges they are facing and hoped that Draghi’s government could speed up the reforms.

The government’s collapse is seen by many as a high risk for Italy’s ability to actually deliver reforms. 

But the mountains protecting much of Lombardy may also make businesses here overlook the fact that it is not only Italy that may be late to implement needed reforms; the whole world is struggling to understand the challenges brought forth by the current economic realities. 

It is only natural for EU member states to struggle with reforms set out in post-pandemic recovery plans, something that may trigger challenges to and changes within EU rules, including those relating to debt and spending. 

It remains to be seen whether such changes will weaken or strengthen the EU.