Italy: The taming of the populists?


Italy remains the weak link in the chain of the euro zone. The OECD expects Italy’s working-age population to shrink by 12.5% ​​by 2040. If so, Italy’s economy can only grow if it makes better use of its workforce. ‘work.

The fact that Italian productivity has almost stagnated for 20 years, increasing only 4% over the whole period, poses a big problem.

In contrast, labor productivity in the euro area excluding Italy increased by 22% in the 20 years before the COVID-19 pandemic in early 2020.

The question of whether Italy’s public debt (probably 144% of GDP in 2022) is sustainable in the long term therefore remains open.

popular discontent

Unsurprisingly, the lack of economic growth has fueled discontent among the political elite. For nearly 30 years, political newcomers have promised change, but failed to deliver.

This process began with Silvio Berlusconi in the mid-1990s. Over the past 10 years, various left and right populists have surged in the polls or even come to power, only to appear much more docile and deflated a few years later.

The anti-establishment Five Star Movement, founded by comedian Beppe Grillo, won the 2018 national election but has lost half of its appeal since then.

Matteo Salvini of the right-wing Lega topped the polls in 2019, only to see support for his party fall below 15% again.

Meloni’s turn?

The new upstart is Giorgia Meloni, the leader of the right-wing Fratelli d’Italia party, a party with post-fascist roots.

Opinion polls predict his Fratelli (“Brothers” in Italian) party will win around 25% of the popular vote in the September 25 election.

In an alliance with Salvini’s Lega and Berlusconi’s Forza Italia, Meloni appears poised to win a majority of seats in both houses of Italy’s parliament.

Barring a major electoral surprise or a setback in her somewhat shaky alliance, she will likely succeed Mario Draghi as prime minister shortly.

Towards turmoil? Probably not

Some aspects of Meloni’s “Italy First” rhetoric resemble Trump’s mantra. His disdain for EU bureaucracy in Brussels contains echoes of Brexiteer arguments in the UK.

Could his victory cause a stir in the Italian bond market? Or even a new euro crisis, if investors fear that escalating conflicts between a Meloni government and the EU will put an Italexit risk on the table? In my view, that seems unlikely.

Taming the Populists

The European Union certainly has its shortcomings. But it remains a formidable instrument for containing disagreements between sovereign nations.

EU leaders meet at least once a quarter on average. They often need each other to get things done in many areas. This exercises a useful discipline.

Italy has arguably already suffered its worst political crash, in 2018, when the then-dominant left and right populists Five Star and Lega banded together to form a government. However, despite some domestic policy mistakes, they have not derailed the EU train at all.

Likewise, Austria’s right-wing FPÖ party also failed to make a splash in the EU when it was part of a centre-right government in Vienna from 2017 to 2019.

Meloni gets real

Sniffing power, Meloni worked hard to be eligible. It strongly supports Ukraine. His stance on migration and subsidies could conflict with EU rules.

Expect some noise. But far from toying with an Italexit idea, she is now simply asking to renegotiate how Italy can spend its €192bn share of the EU’s €750bn NextGenerationEU programme. This is normal for the course.

The EU may be open to some changes in how the money is used as long as Meloni implements the modest growth-friendly reforms the EU requires as a precondition.

An immediate debt crisis seems unlikely. However, it would take sustained and serious supply-side reforms beyond the progress made by Mario Draghi to dispel doubts about the long-term sustainability of Italian debt.


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