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Italy’s Populist Victor Faces the Crunch

Italy’s Populist Victor Faces the Crunch

(Bloomberg Opinion) -- The European Parliament elections were hardly a triumph for the populist parties. But in Italy, the far-right nationalists were on a roll.

The League won 34.3 percent of the vote, doubling its share in last year’s general election. The 5 Star Movement collapsed to just 17.1 percent, but Brothers of Italy, a smaller far-right party, took 6.5 percent. Two in five voters chose to back Italy-first parties opposed to immigration and the EU’s economic and fiscal rules.

This result puts the nation on a clear collision course with Brussels and the rest of the union. Matteo Salvini, the League leader, thinks he has a mandate to overhaul the bloc’s immigration and economic policy. But in Europe, he will have few allies.

The next European Parliament will likely be led by a coalition of pro-European forces, including tahe Social Democrats, the People’s Party, the Liberals and perhaps the Green. The Europe of Nations and Freedom – the far-right bloc including the League and France’s National Rally – has gained seats from 2014, but is likely to remain in opposition. The League’s success is highly relevant for Italy, but much less so in the EU.

For the past decade, Italy has diverged from the rest of the bloc economically. In 2008, the country’s gross domestic product per capita was nearly 6 percent more than the EU average, according to Eurostat. It is now 6 percent less. This discrepancy has now spilled into politics. The League’s demands – which include the right to operate a highly expansionary fiscal policy in spite of the country’s enormous debt levels – will almost certainly be rebuffed by the next European Commission.

The League would have had a difficult time to convince its fellow nationalists, many of whom are fiscal conservatives - especially when it comes to other country’s public finances. This becomes even harder when your political opponents are in charge of the EU’s institutions.

This contrast between the League’s national dominance and European irrelevance spells trouble for the EU. Since the sovereign debt crisis in 2011-12, the dominant narrative in Italian politics has been that the EU – and the euro zone in particular – has treated the country unfairly. This deep sense of injustice has not escaped parts of the opposition, or the economic and financial establishment, including the central bank, which have railed against the EU’s handling of Italy’s banking crisis. But it is the League that has flourished on resentment, making the case that a strong presence in Brussels would ensure that the national interest is defended.

The EU now faces a dilemma. It could try to appease the nationalists, as it did – to some extent – in the 2019 budget. The Italian government, including the League and the 5 Star Movement, is already demanding greater flexibility for its fiscal plans for next year. In theory, Rome should increase VAT by more than 20 billion euros ($22 billion), but the political parties are already talking of new giveaways, including a steep reduction in income tax. The Commission may have no choice but to take a hard line, but this will further incense Italy’s nationalists.

The biggest test, however, is for Salvini himself. So far, the 46-year-old has played his hand masterfully. First, he took a dying League from political irrelevance to become the largest party in the center-right. Then he agreed to an alliance with the 5 Star Movement, even though the League was nominally the junior partner. He completely outmaneuvered Luigi Di Maio, 5 Star’s leader, who has almost halved his party’s share of the vote in just one year and is vulnerable to a leadership challenge.

The League is now the dominant force in Italian politics and can choose to continue governing with 5 Star – as Salvini claims he wants to do – or force a new election in the hope of forming a right-wing government.

But what does Salvini plan to do with all these votes? This fundamental question has never been addressed. The League’s demand are incompatible with what the majority of the EU wants: This was clear before Sunday’s election, and is even clearer now that the votes have been counted. The League has first advocated that Italy should leave the euro, before toning down its message significantly. The party has an openly euroskeptic faction and a more realist one, which wants fewer immigrants, lower taxes – but no messing around with the single currency. These contradictions will need to be resolved, and that moment is fast approaching.

Salvini, the master tactician, will soon need to reveal his strategy, if he has one. But before he does that, expect turbulence, for Italy and for the rest of the EU.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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

Ferdinando Giugliano writes columns and editorials 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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