Salvini Could Be Back to Shake Up Italy Sooner Than You Think

(Bloomberg) -- Don’t write off Matteo Salvini. The Italian right-wing populist who staged a failed summer coup is back.

The European Union and investors had hoped to see the back of the euro-skeptic politician threatening to break EU budget rules. That was before the former deputy prime minister scored a thumping win in a local election in a region that had been a safe center-left stronghold for half a century.

Until recently, Prime Minister Giuseppe Conte had reaped praise for outfoxing popular Salvini to secure a comeback. Yet political fortunes change quickly in Italy. The coalition stitched together to keep Salvini at bay are already starting to panic, according to two officials who asked not to be named.

Just this month, Conte has been hauled before parliament to account for his alleged involvement in U.S. President Donald Trump’s impeachment battles. Then came a report linking him to a Vatican corruption scandal that handed Salvini the chance to stage a second inquisition.

On Sunday, voters in traditionally left-leaning Umbria handed the two-month-old coalition a thorough drubbing. Italian bonds fell with the yield on the benchmark 10-yield debt rising 4 basis points to 0.99%.

“The days of this government are numbered,” Salvini said Monday. “We’ll leave the question of whether it should resign immediately to the government and its conscience. But I do not envy Conte.”

Umbria was the first real test of voters’ sentiment since the anti-establishment Five Star Movement joined the establishment Democratic Party to block Salvini’s efforts to take control of Italy in August.

Five Star had previously governed with Salvini’s League, but after watching his poll numbers march upward for more than a year, Salvini pulled his party out in an attempt to force a national vote. The Five Star-Democrat deal averted an election and blocked Salvini’s route to power. But not his connection with voters.

In Umbria, the League won 58% of the vote beating a joint candidate from the coalition by more than 20 percentage points. Five Star managed just 7% after placing first in the region in last year’s general election. Nationally, the League is at 34% according to a poll by SWG on Oct. 27, that’s about 16 percentage points ahead of both its rivals.

“Whatever government is in place in Italy, there’s always the risk of it eventually breaking down,” said Martin van Vliet, a strategist at Robeco Institutional Asset Management. That “could bring back a less EU conciliatory government.”

It’s not just the election result that suggests investor enthusiasm for Conte’s second coalition may have gotten ahead of itself. S&P Global Ratings disappointed investors on Friday when it declined to raise the outlook on Italian bonds from negative, despite a rally beginning in May.

Hanging over it all is the risk of Salvini’s return –- last time he was in government he challenged EU rules on everything from deficit spending to immigration policy.

Budget Stresses

In Rome, meanwhile, officials are bracing for the annual budgeting ordeal. With the second-biggest debt burden in the euro area, Italian officials draw special scrutiny from the EU’s budget enforcers and are often forced into a series of trade-offs and compromises before they can win approval for the spending plans.

With the governing parties already swapping recriminations over the debacle in Umbria and the League looking to take advantage of every reversal, the prospect of starting year’s negotiations is spreading alarm through the administration, the officials said.

Conte does still at least have some control over his fate. Salvini’s summer setback shows he doesn’t have the votes to force an election and his momentum will encourage both coalition parties to stick with it.

“The proof that the far-right is still a credible threat will reinforce the incentives for the ruling parties to keep the coalition intact,” said Federico Santi, a political analyst at Eurasia Group in London.

‘Better Off Alone’

How long Salvini has to wait for his election, may be dictated by the pain threshold of his opponents.

The League is calling for Conte to testify in parliament again. This time over his work with an investment fund caught up in a Vatican corruption probe -- Conte’s office said he gave the investors legal advice before taking office and there was no conflict of interest.

The budget, meanwhile, needs to win approval from the EU Commission by the end of the year. And then there is another regional election in Emilia Romagna in January.

And the political costs of the coalition are already stirring up dissent.

On Monday, Five Star lawmaker Stefano Buffagni blamed the alliance for his party’s poor showing in Umbria and said that it will be wiped out if it doesn’t change its approach.

“We are better off alone,” he wrote in a Facebook message.

--With assistance from John Ainger and Giovanni Salzano.

To contact the reporter on this story: Chiara Albanese in Rome at calbanese10@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net, Ben Sills, Flavia Krause-Jackson

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