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Italy Faces Its Moment of Truth on the Euro

Italy and Matteo Salvini Face Their Moment of Truth

(Bloomberg Opinion) -- Matteo Salvini’s decision to pull the plug on Italy’s government was, in a way, one of the easiest choices in modern political history. His right-wing party, the League, is riding high in the polls and its populist coalition partner, the Five Star Movement, is collapsing. At the same time the mainstream opposition is fragmented.

A new election would almost certainly establish the League as the dominant force in Italy’s parliament and crown Salvini prime minister. Many commentators – including me – had grown tired of all the intrigue and speculation about whether he’d take the plunge, and had started to think he’d keep the status quo for as long as he could get away with it. Putting that to one side, it’s strange he waited so long.

Now’s the tough part for Salvini. It could take weeks for Italy’s president to decide whether or not to dissolve parliament and call a vote, and months before a new government is in place. Naturally, there are questions over who will write Italy’s 2020 budget, which has to be passed by the end of the year.

Most important, the League leader will have to decide where he really stands on fundamental questions that he has dodged so far – from Italy’s economic policy to its place in the euro zone and the European Union. Before now he could blame his weak coalition partner, the Five Star leader Luigi Di Maio, or his technocratic finance minister Giovanni Tria for any difficulties. The easy ride is over.

It was always going to be a matter of time before Salvini had to make his move. In May the League triumphed in the European Parliament elections, doubling its share of the Italian vote to 34% compared to 2018’s national elections. Support for Five Star, nominally the senior partner in the government, has decreased steadily from more than 30% last year to about half that in recent polls. The center-left Democratic Party is trying to regroup but it lacks effective leadership and is riven by internal divisions. It makes sense for Salvini to exploit these weaknesses.

That he decided to trigger a crisis at this moment rather than immediately after the European elections makes his life more difficult, however. Giuseppe Conte, Italy’s prime minister, expects the drama to be played out through parliament. That means the League will have to vote a motion of no confidence in the government. Since lawmakers are on holiday, it might take time to organize a vote. Even if the Conte administration falls, Italy’s president Sergio Mattarella will check whether it’s possible to form a different government without a new election. That’s unlikely, but it adds an element of uncertainty to Salvini’s gambit.

A general election would take place some time in the autumn after which some horse-trading may be needed to create a new coalition, perhaps with the Brothers of Italy, another hard-right party. While Salvini is popular with voters he might need a partner to govern. This would leave any new government little time to put together a new 2020 budget. Unless a new budget is passed, Italy will face a VAT hike that Salvini wants to avoid.

His chief issue, though, is that he’ll have to show his true face on tax and spending. For the past year he has been given political cover by the fiscally prudent Tria. The League barked about the EU’s restrictive rules on national finances, but backed the finance ministry’s decision to pass a relatively cautious budget for 2019 and a fiscal adjustment in July. For all Salvini’s talk of a “flat tax” to lower Italy’s notoriously high rates, this idea has remained on paper while the tax burden has increased.

Also, how will Salvini manage the “gentlemen of the spread” (his description of the debt markets)? Italy’s bond yields plummeted as Tria’s prudence held sway, but they’re rising again as Salvini sharpens his knives.

An explicitly right-wing government would certainly be more coherent than the anti-establishment Five Star-League hodgepodge that’s ruled Italy since June 2018. It would take a very tough line on immigration, which is bound to create conflict with the rest of the EU. But it might allow for greater infrastructure spending, which has been blocked by Five Star on environmental grounds. 

Still, many of the contradictions that have hobbled the coalition would surely reemerge. The League is split between a euroskeptic wing, which wants to take Italy out of the euro, and a more realist faction, which wants lower taxes but believes Italy should seek compromises with its allies and stay in the single currency. Salvini has managed to keep these two sides together – with a clear majority of Italians wanting to stay within the single currency. But this has only been possible because he didn’t have to take full responsibility for what the current government was doing.

The time for ambiguity will soon be over. If there’s a new general election and Salvini triumphs, the League will need to show exactly what it stands for. After years of wild promises and little action, the moment of truth for Italy in Europe is coming.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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