Security and Foreign Policy

The Italian Government and the Eurozone, A Perfect Storm

The Five Star Movement and the Lega party have reiterated over again that they are working in order to satisfy the legitimate demands and interests of Italians. Marika Annunziata contends it is unclear whose demands and interests are being served at the moment in Italy.


The slogan, “we are working for the Italians,” is sterile and unproductive. Italians have been politically jaded for some time and the last Italian governments have failed to meet the needs of the country since the late 1990s. It would be more honest and straightforward to state quite clearly that the government can only meet the demands of a small percentage of Italians with certain social, economic, and cultural features. Those who are most powerful are the only ones that are able to assert themselves.

After the polls closed on March 4th, the country’s political future has been on knife’s edge for days, 88 days to be exact, ever since earlier talks collapsed when President Sergio Mattarella rejected the coalition’s candidate for Finance Minister. Mr. Paolo Savona was known to be openly opposed to Italian membership to the Euro, and the President’s decision effectively blocked a populist coalition between the anti-establishment Five Star Movement and the extreme right-wing Lega Party; the two largest blocs emerged in March’s political elections.

The Five Star Movement and Lega did not hold a referendum on the single currency membership in the latest election, recognizing that most Italians would not vote to leave the Euro or the Eurozone. Although, it is common knowledge that both parties have always had reservations about Italy’s participation in the European single currency system. The suggestion of Prof. Savona as Finance Minister resulted in suspicious allegations with regard to the political and financial agenda of the new coalition; it was also viewed as an intentional challenge to President Mattarella and the rest of the Member States of the Eurozone. Questions were raised whether the Five Stars Movement and the Lega meant to prompt this crisis or to fuel the forces of Euroscepticism and defiant nationalism in the country.

In fact, the parties refused to form the new government, hence the stalemate. Luigi Di Maio, Five Star Movement’s leader, has called for President Mattarella’s impeachment, while the Lega’s frontman, Matteo Salvini, has questioned whether Italy is still a democracy.

On the other hand, while it is true that the Italian President, under the Constitution, has the power to block individual cabinet appointments, as well as to suggest the name of the Prime Minister who will lead the government, Mattarella’s decision to pursue the former International Monetary Fund Economist, Carlo Cottarelli, to form an interim technocratic administration to prepare the path for a new democratic election in autumn, has destabilized the fragile political balance.

However, on May 30th Italy appeared to be back on course with a new populist government; a coalition comprised of two parties with seemingly clashing ideas. After the leaders of the Five Stars Movement and the Lega agreed to a last ditch attempt to resume the negotiations on Thursday, an agreement was reached and the two parties met all the conditions for a new political government. The coalition nominated Prof. Giuseppe Conte to be the Prime Minister of the newly formed administration. Matteo Salvini is supposed to take on the role of Minister of the Interior, while Luigi Di Maio is slated to be the Minister of Labour and Development. Moreover, Paolo Savona, initially dismissed by the President due to his political views regarding Italian membership in the Eurozone, has been appointed as Minister for European Affairs: a stance that poses very perplexing questions concerning the new administration’s European political agenda.

Now that Giuseppe Conte is sworn in as Prime Minister of Italy as of Friday May 31st, the new administration is likely to take a Eurosceptic stance, colliding with Brussels on the EU Budget, immigration, and foreign policy. Italy, the eurozone’s third-largest economy and the world’s eighth-largest, has experienced two lost decades of economic downturn with living standards close to those of 1997 and an unemployment rate of 11.1 per cent steadily increasing among the young people. Five Stars and the Lega have promised to introduce a fiscally expansionist programme, ranging from two different tax rates of 15 and 20 per cent, a universal basic income of up to 780 € per month, and higher public spending. It stands to reason that both the Eurozone and the markets will react negatively to such haphazard policies. The European budget Commissioner Gunther Oettingere hinted that the markets alone would teach Italy and Italians how to vote in the future. Furthermore, the European Commission President Jean-Claud Juncker lectured Italy and stated that the country and its government cannot blame the European Union for its own problems.

The main risk in a period of great uncertainty is that the Italian state and the Italian banks are declining simultaneously because they rely upon each other and neither has been strong in recent years. The 2008 financial and banking crisis uncovered two particular Italian problems. First, and most serious, is the weakness of the Italian banks. Historically most of the debts issued by the Italian government were purchased by Italian banks, pension funds, and financial institutions. The Italian banks have more Italian government bonds that would be profitable and worthwhile, and investors are becoming increasingly concerned that the weaknesses in Italy’s public finances, namely a very large national debt, will lead to a default on the bonds, leaving them valueless and worthless thereby destroying the financial assets of the banks. Italy along with its banks would be rendered insolvent and beyond the capacity of Germany or the EU to rescue. Hitherto, only a huge programme of buying Italian government debts via the Italian banks by the European Central Bank, in turn funded by the German taxpayer, has prevented this collapse from happening sooner.

Once again, in this regard, Chancellor Angela Merkel, repeated that if the Euro fails, then Europe fails, simultaneously promising to be ready to work with the new Italian government. Yet it does not seem that Europe and its Member States will succeed if the Euro survives the Italian storm. Although it does not seem plausible for Italy to withdraw from the Euro, the three month crisis Italy faced in the immediate aftermath of the election has shown that the Eurozone needs reforms to better serve its Members. The breakout success of two anti-establishment parties has overhauled the Italian political scene and it is difficult to foresee what the future holds for the country and the European Union.

Marika Annunziata holds a Master’s Degree in law from LUISS Guido Carli University in Rome with a main concentration in European and international law. Marika is currently a trainee attorney and is studying in order to further pursue diplomatic career in Italy.

Photo Credit:Alessandra Benedetti/Corbis via Getty Images

Please note that opinions expressed in this article are solely those of our contributors, not of Political Insights, which takes no institutional positions.

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