While the world focuses on Greece, an unexpected election reveals nearby Italy as the true destabilizer in the region. A messy transition could spell the end of one of Italy’s most promising environments for fiscal reform in decades. Reuters reports:
When the 89-year old president of Italy, Giorgio Napolitano, announced this week that he is stepping down soon because of his age, he urged Italians to embrace something that has always been in short order here: national unity and trust in each other and in Italy’s institutions […]Napolitano’s looming departure creates an immediate political quandary for [Prime Minister Matteo] Renzi: Can he bring Italy’s famously fractious political factions together to choose an acceptable presidential successor? If he navigates that battle successfully, there may hope for the coming war to remake the Italian economy and reduce its out-of-control debt, which stood at 132.6 percent of GDP in 2013 and is expected to hit 138 percent for 2014.
An acrimonious debate threatens to destabilize Italy’s government at a time when the country finally holds a fragile coalition in favor of reform. Prime Minister Matteo Renzi passed a law in December that reforms Italy’s fabulously baroque two-track employment system; as the Financial Times’ Simon Kuper describes it, “The old have nice pensions, the middle-aged are unsackable and the young fight for temporary contracts.” But a lot more work on Renzi’s part is needed to make up for decades of political misrule—and with the Italian unemployment rate at a record high, it’s not going to be easy.Greece’s political fallout may be dramatic, but the nation’s small size means that any electoral outcome is unlikely to permanently affect the future of the European project. Italy, on the other hand, is the eighth-largest economy in the world. Napolitano’s retirement threatens to release a slow-moving parliamentary morass that could erase Italy’s golden moment for reform and poison its relations with the European Union as a whole.