Italy’s options all look terrible

Spare a thought for Luigi Di Maio and Matteo Salvini. Italy’s youthful deputy prime ministers have little idea of how they will cobble together a budget for next year. The two leaders of the ruling Five Star and League parties must try to stick by their expensive promises to voters, while not upsetting Italy’s euro zone allies and the financial markets. It’s an impossible task.
So it’s natural enough that Di Maio and Salvini have retreated into their comfort zone: Electoral campaigning. And politically, this month’s European Parliament elections will carry more weight than usual in Rome. The League is nominally the junior partner to Five Star in Italy’s ruling coalition, but it has jumped well ahead in the polls. If Salvini beats Di Maio in the forthcoming European vote, he would be in a strong position to ask for a government reshuffle in his favor – or even a new
national election.
Di Maio is fighting for his political survival since he knows that a heavy defeat could spark a revolt within Five Star against his leadership. For this reason, he has shifted the party to the left, playing the card of social justice and responsibility. The result is that his party is now squabbling daily with its partners in the right-wing League.
All of this is of great interest to aficionados of Italian politics. But to markets, it’s just another distraction. What investors care about is having a government in Rome that’s capable of dealing with the vast challenges facing the Italian economy: Slow growth, a rising deficit, and one of the largest public debts in the euro zone. Sadly, regardless of which of the two populist leaders are in the ascendant, such seriousness is nowhere in sight.
While Salvini picks fights with outside forces, Italy’s problems are largely of its own making. The combination of political and economic uncertainty that’s marring the country is disastrously timed given the rising anxiety around global trade.
Sergio Mattarella, Italy’s president, is considering holding an election as soon as the autumn if the government collapses and there’s no alternative majority, according to Bloomberg News. But even that’s unlikely to make much difference to the markets.
The Five Star Movement could in theory consider an alliance with the center-left Democratic Party, which has shifted further to the left under its new leader, Nicola Zingaretti. Yet the Democrats may be divided over the prospect of teaming up with the populists. A resurgent right of center alliance between Salvini and Silvio Berlusconi’s Forza Italia would be more coherent than the current coalition. But Salvini would need to shift a long way from his current fiscal position to reassure investors.
The best hope for Italy, probably a forlorn one, is that its new caste of political leaders realises the size of the challenge it’s facing. The immediate signs aren’t encouraging. For next year alone, the government has earmarked more than 20 billion euros in VAT increases to try to keep close to deficit targets. That would have
a negative effect on the
consumer.
As the global economic outlook darkens because of the trade conflict between the US and China, financial markets are likely to stay defensive. Once the European electoral campaign is over, politicians would be wise to start thinking of a better case for keeping
investors in Italy.
—Bloomberg

Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times