Italy's Populists Have Earned Their Shot
(Bloomberg) -- Two and a half months after an extraordinary general election, Italy is finally on the brink of getting a new government. The Five Star Movement and the League look set to form an anti-establishment coalition, which would strain Italy’s fragile public finances and inflame tensions between Rome and its euro-zone allies.
The two populist parties still have to finalize their program and pick a prime minister who would suit them both. Most important, they will need to win around Italian president Sergio Mattarella, who has signaled that he wants to play an active role in the formation of a government.
But provided Five Star and the League can reconcile their differences, they should just be allowed to get on and rule. The populists have a democratic mandate, so it’s time their ideas are finally put to the test — whether you agree with them or not.
Ahead of the March election, the League and Five Star ran separately on two platforms full of generous giveaways. In their coalition talks, which started last week after a long stalemate, they could have watered down those promises to try to calm the anxiety of Italy’s European partners. Tellingly, they appear to be planning to just add them together.
The agreement, which is not yet concluded, looks set to include a dramatic lowering of the retirement age, a steep cut in income tax, and a generous income support scheme for the unemployed and low-paid. There’s no detail on how this anti-elite dream team would pay for such lavish pledges.
Italy’s president and the rest of the euro zone are obviously looking on with alarm. According to the currency union’s fiscal rules, countries should be using the current economic upswing to cut the deficit, not increase it. Italy’s public debt — standing at more than 130 per cent of national income — is a time bomb that’s been defused temporarily thanks to the European Central Bank’s quantitative easing. Once the ECB calls time on QE, most probably in the autumn, investors will naturally question how sustainable this debt pile is.
Nevertheless, a League/Five Star coalition would represent what Italians want currently. The two parties won more than half the seats, thanks to agendas that were indifferent to budget constraints and critical of EU economic management. If they can strike a deal, so be it.
The president and the euro zone have tools for keeping a new populist government in check. Italy has signed up to a long list of European treaties, which severely constrain the economic policy of single-currency members. The country’s constitution refers to the need to balance the budget over the economic cycle. The president has the right to veto any law that does not comply.
Of course, the new coalition has the option of leaving the euro zone, if it wished. Both parties have toyed with the idea. But they’ve abandoned it for now because of the market panic that would ensue. They could try to change the constitution, but that’s a tortuous process requiring a big majority or referendum. Absent that, they will have to balance their promises with the rules Italy has chosen to abide by.
The two parties will also find that governing together is much harder than campaigning alone. For years, the Five Star Movement has campaigned on a platform vague enough to attract support from left and right. It now risks alienating liberal supporters by forming an alliance with the League, an anti-immigrant party that admires Hungary’s Viktor Orban. The parliamentary arithmetic is difficult too. In the senate, the two parties have only a wafer-thin majority, which will demand extraordinary discipline.
So let the League and Five Star set sail, if they wish. It’s time they show us how they fare far away from the comfort of electoral pledges.
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