Luigi Di Maio, the leader of Italy’s Five Star Movement, at a campaign rally

Opinion: Where is Italy headed?

  • Italian politicians and international investors are not eager for new elections
  • The Five Star Movement and Lega have no idea how to run the economy
  • A convenient solution would be to leave the caretaker Gentiloni government in place

On March 4, 2018, Italians went to the polls to elect a new parliament. What they have had since is a stalemate. The Five Star Movement (M5S), founded by the comedian Beppe Grillo and now led by Luigi Di Maio, won 33 percent of the vote with its pledge to introduce a guaranteed minimum income for the unemployed. The center-right coalition of Silvio Berlusconi’s Forza Italia and Matteo Salvini’s Lega (formerly the Northern League) won 37 percent, while the center-left coalition led by Matteo Renzi’s Democratic Party (PD) came in a distant third at 23 percent. The turnout, at 73 percent, was rather low by Italian standards.

Despite earlier promises never to compromise with the “old parties,” Mr. Di Maio then spent the better part of two months trying to cut a deal with either the Lega or the PD. The effort caused serious fissures within M5S, whose hardliners resented the party leadership’s power grab as a likely sellout of their ideals. But Mr. Di Maio’s bid fizzled, for two reasons.

First, he insisted on becoming prime minister – an ambition most Italians considered laughable, given the 32-year-old politician’s modest qualifications (he never finished his legal studies and only worked briefly as an apprentice journalist and a stadium usher before joining M5S) and erratic political record. Second, Mr. Di Maio spent most of his campaign insulting his likeliest coalition partner – the social democrats. Many PD leaders dreaded being removed from the power loop, but found the prospect of explaining to their voters why they would agree to carry water for the M5S leader even more embarrassing. The fact that Mr. Di Maio had pirated much of the social democrats’ program in a bid to move closer to the mainstream only made things worse, aggravating ideological tensions within M5S and weakening his leadership position.

Durable deadlock

In a normal political system, this situation would have led President Sergio Mattarella to acknowledge the impossibility of forming a stable government and send Italians back to the polls. However, this conclusion would be too clear-cut for Italy’s circuitous politics, where backroom deals are the rule, regardless of party ideology and campaign promises. Three considerations make a compromise solution to avoid new elections almost inevitable, and possibly even welcome.

First, members of Italy’s parliament earn 14,000 euros a month. Many of the country’s new legislators were previously unemployed and have no intention of jeopardizing their monthly paycheck in a costly campaign. We can therefore expect party leaders to feel strong pressure from the rank and file.

The international community is not necessarily opposed to a weak Italian government, even one led by incompetents

Second, all parties have something to lose. According to the latest polls, M5S is losing ground. Despite Mr. Di Maio’s recent call for new elections in June, Five Star’s electorate realizes that the party’s main campaign promise (the guaranteed minimum income) is hollow and could even backfire, since financing even a meager 500 euros a month to the needy would require a significant increase in general taxation (“taxing the rich” would not be enough). Ordinary Italians oppose higher taxes. This might pose an opening for the Lega, but even here the possibility of gains might be limited.

Finally, the international community is not necessarily opposed to a weak Italian government, even one led by incompetents. During the past two months, shares on the Borsa Italiana have risen by almost 10 percent, as if political instability did not matter. This performance is partly explained by Italy’s corporate sector, which remains competitive internationally and has export potential, even if many companies are poorly run. But it is also true that many foreign observers and investors believe the current political impasse is preferable to the mess that would be created by a Five Star-Lega coalition government.

Economically at sea

From the economic standpoint, nobody knows what would happen if M5S entered the government. Mr. Di Maio has a reputation for unpredictability and abrupt course changes. Until six months ago, he was barnstorming the country promising to take Italy out of the euro. Nowadays, he claims that conditions have changed and that quitting the single currency would have disastrous consequences for southern Italy. The M5S leader now vows to fight to keep Italy in the eurozone and only resort to a referendum “as a last resort.”

Another thing Mr. Di Maio has changed his mind about is reforming the pension system to make it more generous. This idea is no longer mentioned, and a plan to regulate the labor market has also been shelved. Right now, the Five Star leader’s main concern appears to be reassuring Brussels and Washington that he is ready to take their advice.

Italian President Sergio Matterella leaves coalition talks in Rome
April 13, 2018: Italian President Sergio Mattarella leaves party consultations that failed to yield a workable national goverment; his preferred option may be to keep the current caretaker cabinet in place (source: dpa)

The other populist party, the Lega, has not abandoned its anti-euro approach or its promise of a 15 percent flat tax on income. The latter proposal alone would more than double the public-sector deficit, swelling it to nearly 5 percent of gross domestic product from the current 2.2 percent.

It is apparent that Mr. Di Maio (M5S) and Mr. Salvini (Lega) have only the vaguest idea of how to run an economy, let alone a troubled one. If their parties came together in a coalition government, they could wreak economic havoc on Italy. At best, they would do nothing, but even then, the markets’ uncertainty about what they might do next would be dramatic. A Five Star-PD coalition would offer more stability, but it would still fall short of what the country needs.

Safe harbor

A different scenario opens up if the parliament is allowed to stay hung and President Mattarella keeps the current caretaker government in office. Given the need for stability and a strong commitment to Europe, the prospect of Prime Minister Paolo Gentiloni staying on would be welcome to many. Italians like him, and once they realize that the grand reforms promised by the populists are a dream or a nightmare – it depends on the observer’s viewpoint – a Gentiloni government would be perceived as a safe harbor even by those who dislike his affiliation with Mr. Renzi’s social democrats.

More generally, Italy needs balanced leadership – where “balanced” stands for “immune to populist attack.” Level-headedness will play a crucial role when interest rates start to climb, significantly increasing the cost of servicing the public debt. A caretaker government would have fewer difficulties in freezing public spending, while even moderate economic growth could provide enough extra revenue to cover the additional debt service.

Prime Minister Gentiloni's successors may take fright at their own incompetence and refrain from rocking the boat

Even so, it will be difficult to avoid the higher VAT rate being demanded by Brussels. Yet Italians are already expecting that tax increase, which could even be welcome if it helps avoid the much-dreaded wealth tax advocated by some multilateral organizations, including the International Monetary Fund.

What no reasonable person should expect is for Italy to take badly needed steps to boost productivity, investments and, ultimately, economic growth. Structural reforms are out of the question. The best one can hope for is that ruinous measures can be avoided, and that reckless, myopic leaders do not transform Italian opera buffa into Greek drama. If that happens, Italy would fall under the dictate of international technocrats – something its citizens would rightly perceive as a source of more trouble – or face the advent of homegrown populist autocrats like Venezuelan President Nicolas Maduro.

Harmless dalliance

While it is virtually impossible to predict Italy’s political future, there are still reasons for moderate optimism. Italians know that the economy has serious problems, but do not consider them dramatic, and abhor drastic changes unless they see immediate returns. Perhaps Prime Minister Gentiloni will have to pass the baton. Yet his successors may take fright at their own incompetence and fragile grip on power, and refrain from rocking the boat.

This applies to geopolitics as well. Over the past decades, Italy has never played a major international role but has always remained loyal to the Western alliance. This will not change. Mr. Di Maio, once a self-proclaimed anti-Westerner, has already flipped and paid homage to NATO. Mr. Salvini of the Lega still insists on being Vladimir Putin’s friend. Yet the dalliance is fundamentally harmless, serving only to confirm that he (much like Italy) is a foreign policy lightweight.

This is regrettable, of course. But at this moment it is hardly a matter of serious concern. Italian leaders may perhaps drag their feet to appease some voters, but they will not tune out Brussels or Washington. With no idea of what would constitute a genuinely Italian raison d’etat or geopolitical view, they cannot afford to do so.

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