Italy's Populists Win Budget Battle, But Wars Loom in 2019

(Bloomberg) -- Italy’s government survived 2018 -- passing its budget at the eleventh hour -- but don’t be surprised if in 2019 the uneasy populist alliance falls apart, ushering in an early election.

Ahead lies a year in which deputy premiers Matteo Salvini and Luigi Di Maio, the real powers behind the government, will battle for supremacy while trying to work out how they can deliver on promises of a lower retirement age and welfare benefits when they curtailed the funding earmarked for these pledges.

They are an odd couple. Salvini’s anti-migration party is strongest in the business-rich north and Di Maio’s anti-establishment Five Star Movement has an electoral base in the depressed south.

A harbinger of things to come has been Salvini’s surge in opinion polls. Against an unforgiving economic backdrop, the more politically cunning 45-year-old has leapt ahead of his 32-year-old partner, who technically has more seats but whose lack of experience is showing.

The biggest question is whether Salvini will seek a power grab by forcing a government collapse and cash in on his popularity at the ballot box. Italy has averaged one election per year since the end of World War II, and the political drama is a way to distract voters from an economy that has barely grown or lapsed into recession for decades.

Frenemies

“Salvini and Di Maio are in government together, but they’ll be competing against each other ahead of the European Parliamentary elections in May,” said Giovanni Orsina, head of the School of Government at Rome’s Luiss Guido Carli University. “If Salvini does really well in the European vote, he’ll be very tempted to try to force a general election.”

Several senior League officials are pressing Salvini to pull the plug on the government, especially if the party scores strongly in the European vote, and try to engineer a snap election so he can grab the premiership.

Euroskeptic Salvini has already portrayed himself as the champion of forces seeking national sovereignty, with French President Emmanuel Macron and his pan-European ideals as arch-enemy.

Speaking in an interview with Corriere della Sera published on Monday, Salvini said that he doesn’t see any “danger to the government in the coming months.”

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The decision on whether to hold an early ballot in Italy rests with President Sergio Mattarella, who is likely first to seek an alternative to the administration sworn in on June 1.

Thanks to pressure from Premier Giuseppe Conte and Finance Minister Giovanni Tria -- as well as from shaken financial markets -- Salvini and Di Maio ensured a truce with the European Commission by scaling down a budget that Brussels initially branded an “unprecedented” breach of European Union fiscal rules.

Tria himself hailed the budget Sunday as “having concretely chased away any shadow of Italexit” from the EU, and “putting an end to the race of the spread,” the 10-year yield gap with German bunds which is a barometer of economic sentiment.

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But Brussels, which has the power to impose fines on Rome, has warned it will continue to monitor Italy’s performance.

“We will follow the execution of the budget attentively,” European Union economy commissioner Pierre Moscovici said in a Twitter posting on Sunday. “I would like to repeat again that the dialogue with the Commission focused only on the respect of our rules, never on individual measures!”

That’s ominous as the spending plans have stoked investor worries about Italy’s debt mountain, the biggest in the euro area in real terms, and economists are concerned the economy could slip into recession. Rome has cut its gross domestic product outlook for next year to 1 percent from 1.5 percent.

In the interview with Corriere della Sera, Salvini also said that he hopes “this will be the last budget passed with long and complicated negotiations with Brussels.”

Reshuffle?

Further undermining the government is the prospect of the ouster of key figures. Rumors keeps resurfacing despite public denials -- the latest was a visual one, with Tria flanking Conte during Sunday’s debate in the lower house after the premier was reported to be seeking the minister’s removal.

“Expect a reshuffle very soon, or at the latest after the European vote if we don’t have a snap election,” said Orsina. “Salvini’s rise in polls means he wants at the very least to grab more jobs in cabinet, and possibly renegotiate the government’s program.”

Those whose jobs may be on the line include Transport Minister Danilo Toninelli, who is responsible for big infrastructure projects including a proposed $10 billion rail link between Turin and Lyon that his Five Star opposes. Salvini’s League, with its strong business constituency, could seek a figure in favor of such projects.

In the meantime, exhausted by the wrangling with Brussels and the push to get the budget through parliament on the eve of a Dec. 31 deadline, Italy’s leaders just want a break.

“Now we’ll give ourselves a few days’ rest,” Conte said after the final vote.

--With assistance from Kevin Costelloe and Lorenzo Totaro.

To contact the reporter on this story: John Follain in Rome at jfollain2@bloomberg.net

To contact the editors responsible for this story: Flavia Krause-Jackson at fjackson@bloomberg.net, Tony Halpin

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