The Italian Economy’s Moment of Truth
Unlike many other European countries, Italy still has not restored economic growth to its pre-crisis level – a fundamental failing that lies at the heart of many of its political problems. Now that a new anti-establishment government is taking power, it remains to be seen if the economy will be remade, or broken further.
MILAN – Italy and Europe are at an inflection point. After an election in March in which the anti-establishment Five Star Movement (M5S) and the far-right League party captured a combined parliamentary majority, followed by months of uncertainty, Italy has become the first major EU member state to be governed by a populist coalition.
M5S and the League both openly question the benefits of eurozone membership, though neither party made leaving the euro a specific commitment of their governing program in the election campaign, a failure that Italian President Sergio Mattarella seized upon in vetoing key cabinet pick. They also disdain globalization more generally. The League, in particular, is obsessed with cracking down on immigration. On the domestic front, both parties have promised to tackle corruption and topple what they see as a self-serving political establishment, while introducing radical policies to reduce unemployment and redistribute incomes.
Still, we won’t know the precise dimensions of the M5S/League agenda until the populist coalition begins governing in earnest. There are rumors that the parties want to write down Italy’s sovereign debt, which currently stands at a relatively stable level of just over 130% of GDP. If they did, a Greek-style confrontation with the European Union would seem certain to follow, with interest rates and spreads on Italian sovereign debt increasing rapidly, especially if the European Central Bank decided that its mandate precluded it from intervening.