It Could Only Happen in Italy

By Roy C. Smith

Though a founding member of the European Economic Community and of the European Union, and a first round participant in the euro, Italy has always posed an existential threat to these institutions because its heavily working class voting population has never trusted the so-called elites, was always suspicious that the wheeling and dealing politicians that came forth were corrupt or incompetent, and never felt very European.  

In 1946, after more than 20 years under Mussolini, Italy established by referendum a democratic republic. But Italy was not a normal country then; from 1943 when the Italians surrendered until well after the German forces exited in 1945, Italian partisans rose up aid allied forces fighting the Nazis, but also to seek revenge on Italian fascists and/or supporters of the Germans and their collaborators. As many as 30,000 Italian were killed by their countrymen in 1945 and 1946 alone.

For most of the next 50 years, however, the dominating political party was the center-left Christian Democrats, whose main job was to keep the Italian Communist Party (the largest and most accepted in Europe) from gaining control of a government. In these 50 years, however, Italy had more than 50 governments, as the Christian Democrats wheeled and maneuvered to stay in control through coalitions, alliances, pay offs and deals of various kinds. But, the Christian Democrats kept their hands on the tiller through this time (making Italy less volatile than it seemed), but voters continued to seethe with a long list of discontents (including too many politicians with their hands in the till).

In the 1970s, the extreme left Brigate Rosse (Red Brigades) emerged and introduced terrorism to Italian politics in a “Decade of Lead.” The group was not part of the Communist Party but seemed aligned in political objectives. In 1978 the Red Brigades assassinated prime minister Aldo Moro.  They have been associated with 14,000 acts of violence. But they had some public support from the working class, whose sentiments were portrayed by the hugely popular Italian comic playwright Dario Fo (Nobel Prize in Literature 1997) in The Accidental Death of the Anarchist and Can’t Pay! Won’t Pay! (Fo is now a mentor to the populist-left, protesting Five Star Movement founded by a popular TV comedian and social media blogger, Beppo Grillo, in 2009).

In the 1990s and 2000, Silvio Berlusconi, a media billionaire with characteristics resembling Donald Trump, entered politics and was elected prime minster three times, serving a total of 9 years, longer than any other post-war Italian leader.  Though a successful businessman, Italy’s economy lagged the EU average during this time, and unemployment was higher. Berlusconi never attempted any of the labor and other reforms that other countries in Europe were undertaking at the time. He was very popular with the working class - running for office as an in-your-face conservative but governing as a populist. In 1994 his first government was defeated and a “technocratic government” headed by a former government official was appointed to run things.

Berlusconi resigned again in 2011 during the European Sovereign Debt crisis, and economist and former EU commissioner, Mario Monti, was appointed prime minister of another technocratic caretaker government until 2013.

During this time, Matteo Renzi formed a new Democratic Party to bring about needed reforms and bring Italy into the European mainstream. He was elected prime minister at 39 in 2014, with 60% of the vote and immediately began to introduce long overdue labor reforms, and to modernize Italy’s state-owned-industries and sell off assets. Despite much opposition he was successful in getting labor and other laws changed. He also introduced a change in Italy’s constitution to reduce the power of the Senate and make the Italian legislative voting system more democratic. Though the constitutional reform had the approval of the legislature, it had to pass a referendum, which in late 2016 it failed to do. Renzi then resigned as prime minister.

Italy’s next election in 2018 resulted in a surprise victory by the Five Star Movement, which gained a plurality of 32.2% of the vote, beating out the Democratic Party (18.9%), still led by Matteo Renzi, that only barely outdid an upstart, far-right League Party (17.7%), forcing an awkward coalition attempt between the far-left and the far-right.  

This effort, which involved the designation of a prominent lawyer without government experience to be prime minister (instead of either party’s head, a difficult and cumbersome compromise) failed when the two parties proposed an 81-year old anti-euro former Bank of Italy economist to be Minister of the Economy.

President Sergio Mattarella, acting within the constitutional powers of his office, rejected the coalition proposal on the grounds that the election was not about leaving the euro, which the proposed ministerial appointment foretold, and voters did not know when they voted that the parties might attempt a ”back-door exit” from the currency system that Italy had supported from the beginning. Instead, President Mattarella designated Carlo Cottarelli, a former IMF official, to become prime minister and to form another (a third) caretaker government. This new government, though, is opposed by the two parties that are attempting the coalition, so it is certain to not gain parliamentary approval, therefore triggering a snap election in the fall of 2018.

Such an election may legitimately be presented as a referendum on the euro, which considering populist sentiment in Italy could result another ill-informed Brexit.  Referendums in Europe are dangerous things.

Mattarella was not eager to have an early election under these conditions, so he was open to a different proposal from the coalition - to appoi9nt a different Minister of the Economy and let the 81-year old economist take another position in the government. Talks continue, but meanwhile, interest rates on Italian government bonds rose by  150 basis points in just a day. 

Departing the euro would be far more painful to Italy than Brexit would be to the British. Leaving the euro would mean readopting the Lira, watching it fall in value relative to the euro and increasing the burden of Italy’s $3.2 trillion debt (173% of GDP) on its citizens, and limiting the availability of new credit to Italy’s government and private sector. Banks would be forced to curtail loans, interest rates and unemployment would rise, probably sharply. Growth rates would slump into a recession that could last a long time, like Greece’s. And, in its economic distress, it would get no help from the European Stability Mechanism or European Central Bank, which can only aid euro members. As in the case of Brexit (where the issue was leaving the EU, not the euro), it is unlikely that the average voter will be aware of these consequences of an anti-euro vote or believe what they are told about them.

All this could be worse for Italians if the Five Star/League consortium also choses to leave the EU, something that some of their fervent anti-immigrant advocates believe is necessary. Italy has been awash with immigrants from Africa for several years. Leaving the EU would mean leaving the custom union (the Single Market) and the Schengen Area (no passports needed) that could curtail Italian economic growth and inward investment flows further.

Some Italian observers believe that a September election will ignite the worse of Italy’s populist complaints. Mattarella, who believed the coalition’s government proposal was harmful to Italians of all classes, nevertheless is seen as being outrageously wrong in cancelling the results of a democratic election. The populists also believe that the “establishment” political parties are not listening to the common pleading of all Italians to limit immigration and unwanted, unfair pressures on Italian life by the EU that leaves too many Italians poor and unemployed. They want the government to extend social services further to help all who need it, whatever the cost. Italy’s government debt, already 131% of GDP (the highest in the EU except for Greece) would likely explode if the coalition’s announced plans to block immigration and increase social spending were implemented.

Italy’s EU allies, some of which are fighting similar political battles in their own countries, are powerless to help. They know that an exit from the euro by Italy would be a grave threat to the ability to hold the currency together. But also, that Italy could face a banking and sovereign debt liquidity crisis similar to that confronted by Greece, Ireland, Portugal and Spain. Such a crisis would be too big to handle, and beyond the limits of voters in Germany, Holland, Denmark and other countries to tolerate as a cost of being in the currency.

Brexit may not be enough to break up the EU, but an Italexit could break the euro.   

True enough, but this is Italy – anything can still happen.