Italy’s New Coalition Is Already Looking Shaky

(Bloomberg Opinion) -- Giuseppe Conte looks set to form a new government in Italy, after activists from the Five Star Movement backed an alliance with the Democratic Party. The speedy resolution of Italy’s political crisis offers a striking contrast with the enduring chaos in Britain. But the basis of the new coalition, including the program and the likely ministerial team, appear extremely shaky and give little hope for a stable and effective administration.

Political negotiations are always painful to watch but the talks between the Democrats and Five Star were especially gruesome. Luigi Di Maio, the inexperienced leader of the Five Star Movement who has halved his party’s support while in government, reportedly insisted he should stay as deputy prime minister. The Democrats refused because they feared this would show too much continuity with the previous alliance between the hard-right League and Five Star. Di Maio eventually gave up, but he insisted there should be an online vote to approve the alliance by party members; critics feared the poll would vulnerable to hacking and manipulation. But activists backed the deal with a majority of close to 80%, ending this sorry spectacle.

A Five Star-Democrats alliance could be sworn in today, but it is still not clear what it will stand for. On Tuesday, the two parties put together a 26-point wish list, which included a range of lofty promises from promoting meritocracy to protecting public goods. What is clear is that the government wants to push for a more expansionary fiscal policy to promote greater public investment and cut taxes on labor. Italy’s borrowing costs have fallen sharply, with 10-year bonds yielding less than 1%. The trade dispute between the US and China also has hit the euro zone economy hard, justifying some form of extra spending. But Italy’s fiscal space is still limited: The previous government has pledged to raise VAT next year, which is expected to bring in an extra 23 billion euros ($25.3 billion). The Democrats and Five Star want to scrap the increase: If they do this, the deficit will rise to around 3% of gross domestic product, making it harder to fund the other measures they have in mind.

The government contract also barely touches on the areas where the two parties are bound to clash. The Democrats have lurched leftwards recently, which could make it easier to find consensus with Five Star on measures including raising taxes on corporations and on high-income individuals. However, a centrist group of MPs around former Prime Minister Matteo Renzi could make it harder to push for a redistributive agenda. Five Star is also skeptical about several infrastructure projects, including a high-speed train connection between Italy and France, which the Democrats back. This particular rail link exposed the divisions between the Five Star and the League, making the previous government collapse. It could do it again with the new administration.

Finally, the rumored government team overall appears unimpressive. Di Maio is tipped to become Italy’s foreign minister – a role which the Democrats hope will keep him far from domestic policy. But his appointment would be a slap in the face of diplomats and euro zone partners, who have been astonished by his inconsistency when it comes to foreign policy. In 2017, Di Maio courted French president Emmanuel Macron, saying in an open letter their two parties could renew Europe together. Then, in February of this year, Di Maio visited a delegation of the “yellow vests” in France at the height of their violent protests, prompting the French government to recall its ambassador in Rome. How he can become the head of Italy’s diplomatic service is anyone’s guess.

Roberto Gualtieri, an MEP from the Democratic Party, is on course to become economy minister. As chair of the influential Economic and Monetary Affairs Committee, Gualtieri has pushed to water down the rules on state aid and non-performing loans which Italian banks have criticized. But as a good mediator and a Brussels insider, he could prove useful in negotiating with the Commission a sensible compromise over this year’s budget.

Matteo Salvini, the League leader who prompted the previous government to collapse in the hope of securing an election, will no doubt have a few regrets as his plan backfired so spectacularly. But his moment may have not gone forever. It will be easy for him to attack such a weak government on issues including immigration and economic policy.  The new Conte government is not yet born, but its enemies already appear ready to pounce. 

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.

©2019 Bloomberg L.P.

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