No country in Europe is more critically important to the future of the European Union and the euro currency than today’s Italy. Britain’s leaving the European Union is taking longer than Prime Minister Boris Johnson wishes, but the parliamentary rear-guard actions to delay or even delete Brexit are now weakening, as it becomes clearer that—assuming a Conservative victory at the general election on December 12, by no means certain but presently the best bet—it will happen. Italy, by contrast, is going nowhere: which is its, and the EU’s, largest problem.
Italy is going nowhere economically. Its growth is minimal—0.1 percent this year. Its debt is highest in the developed world after Japan. Its productivity is among the lowest in Europe. Its unemployment rate is hovering around 10 percent, with the three southern regions of Calabria, Campania, and Sicily registering over 20 percent. Youth unemployment stands nationally at 29 percent.
Its government from March 2018 to August 2019 was a coalition between two parties usually described as populist-nationalist. The Five Star Movement (5SM), created by the comedian and government critic Beppe Grillo a mere ten years ago, calling for a sharp reduction in the numbers of members of parliament as the first step in a shift from parliamentary democracy to voting through the internet and—most popularly—providing a citizens’ income, had secured the largest vote of the two, at over 32 percent. The other, the Lega, formerly Lega Nord, was founded thirty years ago with a mission to separate the rich north from the poor south. The main plank of its economic platform was a flat tax, allied to a block on all immigration from North Africa and greater powers for the police. It took a little less than 18 percent.
Together with the small (4.35 percent) Fratelli d’Italia (Brothers of Italy), they gained majorities in the upper and lower houses. Both saw themselves as mould breakers. And so they might have been, but their time in governance was, from the beginning, fractious. Though the Lega’s vote had been far behind that of the 5SM, the Lega leader, Matteo Salvini, one of two Deputy Prime Ministers with 5SM’s leader Luigi Di Maio, largely ignored his duties as Interior Minister—instead touring Italy giving speeches, having selfies taken, issuing almost daily orders to stop migrants landing on Italy’s shores and execrating leftists and liberals for their softness on crime and incarceration.
Salvini overplayed his hand. With party and personal poll figures approaching 40 percent, he ended the coalition and called for elections. But he was thwarted: A figure seen as largely ceremonial, that of Giuseppe Conte, a law professor drafted in as a Prime Minister (since neither Salvini nor Di Maio could allow the other to take the post) humiliated him in parliament, and—in a pre-planned maneuver with President Sergio Matarella—switched to lead a new, quickly agreed coalition between the center-left Partito Democratico (PD) and the 5SM—a remarkable ideological sleight of hand.
For the past three months, this new creation, bringing together two parties that had vied for the intensity of contempt each felt for the other, have been yoked together in a government whose ability, or lack of ability, to reform Italy and retain power is at the center of concern of the new leadership of Europe’s union. Its ability to do so is constrained by its apparent lack of popularity in Italy. Salvini, now in opposition, gathered his forces and handsomely won the provincial elections in the traditionally leftist province of Umbria in late October. He presently seems able to reconstruct a right-populist coalition, which will again command the assent of the Italian majority—if only he can provoke an election. Lacking one, he can help make the country ungovernable and pile pressure on the 5SM, now in deep trouble electorally, taking a mere seven percent of the Umbrian vote.
As the Italian economist and former Treasury official Lorenzo Cadogno remarks, “new government, same old problems.” Pulling the beautiful peninsula out of its downward spiral would tax the most coherent and experienced administration: The present coalition is neither. I put the issue of Italy’s short-term future to two of the sharpest observers of the country: Cadogno himself, and Martin Wolf, chief economic commentator of the Financial Times, a self-expressed Italophile and one of the leading analysts of the global economy.
John Lloyd for The American Interest: What are the main forces in play in government, or supporting the government? How likely is the new coalition of the PD and the 5SM to remain together and work effectively?
Lorenzo Cadogno: You have in the coalition the PD and the Five Stars—which has a large representation in parliament, though they have lost a lot of support in the country since they did so well in the March 2018 elections. Then supporting them there is [Matteo] Renzi, former PD Prime Minister, who left the PD to form a new party, Italia Viva, which has not taken off. But he will make a lot of noise, will attract attention. You have the far-Left, which is now very small. Keeping these people together will be very hard. They came together, really, by chance, after the collapse of the Five Stars and the Lega coalition in August. The only thing that keeps them together is fear of Salvini, leader of the Lega.
There isn’t [as of November 2019] an agreed program. There were basic disagreements among them. There seems to be no underlying strategic plan—just a number of different claims from the different parties. It’s still early, but if they don’t come together and thrash out some common positions, things might be difficult for them.
Martin Wolf: Some of the reforms needed are essentially fiscal management reforms. In the end, in the past 25 years, Italy’s fiscal management, given very low growth and aging, has been astonishingly good. But the main problem in the debt issue is simply that GDP has fallen. Yet I would say that, one way or another, they will find a way to manage decline as long as bond yields remain where they have come now—around 2 percent. As long as they can finance that, they can operate effectively.
The question is a different one. It is: Can they generate sustained growth? Given the population, sustained growth wouldn’t be very high, but suppose they had growth of around 1 percent plus, better than zero. Could they do that? And the answer to that is yes—if three conditions apply: 1. The Eurozone itself is growing reasonable strongly, because it’s their most important market; 2. the euro is at a competitive level internationally, which it has been; 3. the productivity dynamic improves without wages absorbing it all. The first is unlikely—because the Eurozone is weak, because Germany is weak. China may never again provide the boost it gave Germany in the past ten years.
As for the second, the euro should remain competitive on most assumptions.
The third is crucial. Can you imagine a big turnaround in competitiveness in the north? The north has to become like Germany. And some of it is, but it’s too small and it needs to be growing much faster. Luigi Zingales [professor of finance at the Chicago University Booth School of Business] has said that, for all its strengths, the traditional Italian SMEs [small- and medium-sized enterprises] cannot succeed as the German Mittelstand [medium-sized companies] does. The Italian sector is not so technologically informed, and their big enterprises are not really the match of the Germans, except Fiat—and much of that company has gone abroad.
A far too large percentage of bright people will move abroad and continue to do so. Taxes will remain high, which is rather a depressant. Italians really don’t embrace a very dynamic service sector. So the reforms one can imagine seem inconceivable to me.
The new coalition was cobbled together quite rapidly at the end of August. Under pressure from President Sergio Mattarella and, behind the scenes, the European Union, two parties agreed to form a government under the premiership of Prime Minister Conte. Di Maio, the 5SM leader, with no experience in foreign affairs, was given the Foreign Minister’s portfolio. The PD took most of the economic posts, including Economy and Finance, which went to Roberto Gualtieri, a former Member of the European Parliament who had headed up its Economic and Monetary Affairs Committee. Italians found themselves again under the political leadership of a government that once more professed the more customary enthusiasm for the European project, and its place in it.
But—as in 2011, when Berlusconi was forced to resign under pressure from the then-President Giorgio Napolitano, with open encouragement from German Chancellor Angela Merkel—there was no election. A cabinet of experts under the premiership of Professor Mario Monti, one of the country’s most prominent economists, ruled in 2012—at the end of which Berlusconi’s Forza Italia party withdrew its support from Monti’s unpopular austerity program, which he had judged necessary to tackle the burgeoning debt (it has since grown considerably greater). In the 2013 election, the party Monti had formed, Civic Choice, came in fourth with a mere 10 percent of the votes. Parties and governments that try to make Italians face up to their country’s problems don’t gain popularity.
TAI: The problem with fixing a new government at the behest of the European Union is that, when the government is seen to be irresponsible by the EU and the President, they get together and engineer a new government. But there is no intervention of the people. Democracy suffers. Has it come to the point, in Italy in the 2010s, where either democracy suffers, or the economy suffers? The two can’t win together?
Wolf: Essentially. The problem of the euro is that it separates democratic politics from power. It separates accountability from power. The accountable people—in the sense that you can get rid of them—aren’t in power, and the people in power aren’t accountable to the Italian electorate. The people in power are those like the Germans and Dutch. From the macroeconomic point of view Italy is not a sovereign nation. Its democratic politics is not sovereign politics. The way Italians vote has no bearing on how they are governed. This [the euro] is a political project which creates a divorce. So far it is clear that, in all the governments of the Eurozone, they have accepted the constraints of the euro—very costly and very hard to get out of—and accepted therefore the neutering of the democratic process. An overwhelming majority in the last Italian election said “we don’t like this. We want a big change—of some kind.”
TAI: Prime Minister Conte, who led the previous coalition of the Right and now this one of the center-Left, has himself never been elected to anything. Is that important? Does the electorate not mind?
Cadogno: That is part of the problem but certainly not a major problem. I have to say he is doing surprisingly well as a politician. He is the only positive surprise in this.
TAI: What’s a bad case scenario for Italy today? You [Cadogno] have written that the reforms made by the previous coalition—lowering the pension age, bringing in a citizens income—cannot now be changed, even if they are too expensive. In a recent essay [September 26, 2019], you wrote that, despite the much better relationship with the European Union and some signs of greater confidence in the future of the economy, a great deal of uncertainty surrounds the future:
Italy’s underlying budgetary and economic problems are unchanged and will continue to be a significant concern going forward . . . a coherent plan to enhance potential growth is missing as the current one contains many contradictory statements. . . . [R]eversing the unsustainable rise in spending on pensions introduced by the previous government will be a difficult political hurdle to overcome. . . . [T]he 2011 crisis devastated both the economy and, perhaps more gravely, the mechanism for achieving political consensus for reforms. . . . [A]ny attempt to impose unpopular, socially harmful measures risks further boosting the popularity of the anti-establishment Far Right opposition led by Matteo Salvini and the League.”
This seems a rather despairing forecast.
Cadogno: Well, when you give money to people, it’s very difficult to get it back! And especially the pension reform—when you have people who see their work ending on a specific date and the pension beginning, then suddenly the government changes, the people have already made plans, financial plans, plans for their life—so if there is any change possible, it will be small and in stages, as it will be with the citizens’ income, which is a 5SM policy and thus hard to shift while they are in the governing coalition.
TAI: What’s your [Wolf’s] worst-case immediate future for the Italian economy?
Wolf: A series of events between an imaginable Italian government and imaginable governments in the rest of the European Union could lead to Italy crashing out. To be clear: It would be an accident, the product of a series of events. When you get again a government in Italy which is intensely uncooperative and irresponsible—not of course this government, but an irresponsible government that creates a situation in which there is a run on Italian banks by Italians—this would force the ECB into a massive refinancing operation. Possibly the ECB has to buy Italian government bonds—and certainly to agree to re-liquefy the banks, on an enormous scale. We’re assuming here a government that runs a huge fiscal deficit.
It’s an administration that takes an entirely hostile attitude to the European Union. Salvini would do this. And the only way to proceed legally might be a fully-fledged ECB agreement, IMF involved, with Italy. The Italian government might refuse to do that because it would be seen—and it would be—a massive intervention into sovereignty. But the ECB doesn’t have enough money to refinance Italy—so we are in a situation that Greece was in when its banks were closed. Essentially on this scenario, the Italian government would have to stop Italians taking money out of their own banks.
They could still be notionally in the euro—but if they really shut the banks and forbade transfers, Italian companies couldn’t finance themselves, or finance their trade. No one would lend to them because the exchange rate risks would be so severe. The banks wouldn’t be able to transfer money out of Italy. They would not be able to create euros because it would need the agreement of the ECB.
A populist government—which might even have prepared for this—would say, well, we haven’t done it; they’ve [the EU] thrown us out. And we need to get our lira back. So all the money in your accounts would be converted into lire, and after six months of really terrible chaos you would have a new currency, and would have dropped out of the euro.
If a lack of confidence in Italy becomes really serious, it seems to me this outcome is feasible. Of course, any time an Italian government gets close to this—and they did get close to it in 2012 when they got rid of Berlusconi—the Italian establishment seems to have felt that they had seen this before—so with, I assume, a lot of pressure on the PD, they have created this new (PD and 5SM) coalition. The political system has formed on this—that when they get close this sort of situation, they engineer a euro-acceptable government. They can do that again and again. In fact I don’t imagine that the Italian people have any desire for this kind of outcome: the disaster outcome.
Also, we should say, I think the French will always want Italy in—despite all their difficulties with it. France would be very uncomfortable to be in such a German-dominated EU as would emerge without Italy. I’m saying that France will support—help Italy—will support giving it the rope even if that means breaking the rules. Why is Christine Lagarde head of the ECB? Precisely to do that. Keep Italy going. The ECB has bought a lot of Italian bonds already, but they could buy a lot more.
But a crash-out could happen because you elect a crazy, and you give him enough votes to go ahead with this, and no-one manages to stop him.
So I don’t see any likelihood of a planned exit from the euro, of the European Union, but every likelihood of an accidental one.
TAI: Cadogno is right to warn that efforts to rein back popular programs, as reductions in the pension age, will help the Salvini-led Right. It is clearly still a very powerful force. The three right-wing parties, fielding a single candidate—the Lega’s Donatella Tesei—for presidency of the Umbrian region in late October, won a decisive victory over a Left that has represented Umbria for nearly all of the post-war period—a huge shift in peoples’ voting patterns. Umbria is a small region, with fewer than 900,000 people, but the scale of the defeat, and especially the collapse of the 5SM vote , from 27 percent in the 2018 general election to 7 percent today, is at the least a sign of the right’s continuing strength, and the center-left coalition’s fragility. Prime Minister Conte dismissed the Umbrian vote even before it took place, saying the result would not be about his government, but of course it partly is. And it will be impossible to claim this again if, in January 2020, the 4.5 million-strong population of the Emilia Romagna region, solidly left-wing since the war and the heart of what had been Italy’s “red belt,” votes for the Right (the polls presently show Left and Right neck and neck). That would be, would it not, an existential moment for the center-Left, an opening to a return to power of the Right?
Cadogno: Yes: I wrote after the Umbria result that, should regional elections end up with results similar to Umbria’s, things would change. Poor electoral results would force a clarification within the 5SM, and possibly even a split between the left-leaning and the right-leaning part. Moreover, if the 5SM-PD alliance blows up, it would also undermine the current tendency to move back to a bipolar system, which is a positive development for Italy’s political stability . . . despite the repeated attempts by Berlusconi to re-launch his party, Forza Italia continues to weaken. The Lega and Brothers of Italy now try to promote themselves as more moderate, but they would effectively put the far Right in the driving seat of the center-Right coalition. Finally, if the 5SM-PD alliance collapses, with the current electoral system the center-Right would get close to a two-thirds majority in Parliament in any new elections—that is, it could change the constitution and many other things. Bottom line: For now, the above probabilities remain unchanged, but the next regional elections may become key for Italy’s political prospects.
TAI: But will the Right be caught in its own extremism? Or will Salvini tack to the center, partly to get votes from the supporters of Berlusconi’s apparently crumbling Forza Italia, partly to look more like a future Prime Minister of Italy? At the grand rally which the Right held in Piazza San Giovanni in Rome [on October 19] Salvini seemed to gain momentum. He has recreated the right-wing alliance with Silvio Berlusconi’s center-Right Forza Italia and Giorgia Meloni’s far Right Fratelli d’Italia. Both leaders spoke with him at Piazza San Giovanni. The crowds were very large (he claimed 200,000, though it was probably a bit less). The Casa Pound group (extreme Right) was there, but very quiet, unlike in previous gatherings, where it had been seen to support Salvini and give fascist salutes. It was a surprisingly moderate, efficient occasion.
Cadogno: I think Salvini is trying to move towards the center of the country’s politics. Now that the relationship with the Five Star movement is broken for the time being, he has no choice but to move back from the extreme, if he is to lead a right-wing coalition. He gave an interview to Il Foglio [a daily paper], and said that there is no intention to exit from the euro or the European Union. I am still skeptical, because he is clearly still anti-EU, but he is trying to present himself as a reliable right-wing leader. If this succeeds, we may be seeing a movement back to a two-party system (with the Left relying on the PD-5SM coalition and the Right made up of the Lega, Fratelli d’Italia, and Forza Italia).
TAI: Berlusconi, of whom one can never say he is finished after nearly four decades in or near the top of Italian politics, now leads a much-shrunken party. But he still believes he has enough influence to be a moderating, pro-EU force in a Salvini-led coalition.
Cadogno: He believes that, but I know from talking to people in his party that they were very close to splitting. Many of the people in Forza Italia said they would never work with Salvini. Several refused to attend the rally in Piazza San Giovanni at which Berlusconi spoke. And it is anyway in a difficult place. It’s small, and Berlusconi is old  and no longer perceived to be a dynamic person. And everyone wants a piece of Forza Italia now. Both the Lega and Fratelli d’Italia want the votes of those who were supporters of Forza Italia—and to get them they must look more moderate.
TAI: People both in Italy and abroad speak of fascism developing from the Right.
Wolf: Salvini is fascist-ic but I don’t think he’s there. I don’t really believe that a very old country which is still reasonably stable and prosperous would go soon for something so rash, so risky. People would think: We’ve done that before and it didn’t go well. It could, however, be Orbánism with a harder edge (as exists under Prime Minister Viktor Orbán of Hungary, who has favored “illiberal democracy”). There’s enough reactionary force in this society to produce Orbánism—or Poland, say—though Catholicism, oddly enough, isn’t as powerful here as there. If Italy were to go in the Orbánist direction, that would be, my God, a crisis for the European Union.
At the heart of the political debate in Italy—not as central as in Brexiting Britain, but much less taken for granted as a good thing than at any time since Italy joined the forerunner of the EU, the European Economic Community, in 1957—is the relationship with Europe, and above all membership in the Eurozone. In this, the two experts diverge—perhaps on national lines. Cadogno, as he says, is “very much a pro-European.” Wolf is pro-EU but has been a consistent opponent of the euro.
TAI: There’s a view that the euro has been bad for Italy? Do you think it was a mistake to join it?
Cadogno: No, I think it was not a mistake. It was the policies Italy followed after joining that were the mistakes. Italy should have reformed the economy. Italy didn’t fully understand what this was all about. Many other countries were the same. They didn’t see what the new conditions, the new currency, meant—and it took the crises (of 2008 and after) to show something of the facts and the vulnerabilities. I am very much a pro-European, but the problem is that the project isn’t going ahead the way it should. It remains a very fragile construction. Inevitably this makes it subject to other crises in the future.
TAI: Do you think a new leadership in the European Union will try to create greater fiscal integration, to reanimate the project of closer union?
Cadogno: I am not very optimistic, to be quite honest. I think that [French] President Macron did try hard to push for this. Germany clearly has to change its stance, but I’m not sure that anyone replacing Merkel will make a big difference. Sometimes there are positive signs from Germany—maybe little by little they will take a more expansive stance. But on the new EU leadership: It doesn’t presently look strong, and it can’t rely on a strong majority in parliament, so I’m not optimistic.
TAI: Martin, you have another view, I think: that Italy’s membership in the euro was a mistake.
Wolf: Italy has been on a course of managed decline. They should never have got rid of the lira—that wouldn’t have solved anything, but it would have been better than it is now. They’re in a prison—though they put themselves in it.
I have had discussions with Italian business leaders. I’ve said: You screwed yourselves. You took advantage of the low interest rates but never said “we must benchmark ourselves against the Germans, in productivity, in pay.”
They thought it was a free lunch. Berlusconi said it was a free lunch. They needed a government to say “we won’t take advantage of the low interest rates, we’ll run a huge surplus so we can really get our debt down.”
They should have had a serious politician to say, “We have decided to join the euro. We are the weakest country in the Eurozone. We have much more debt than anyone else. Our industry isn’t in great shape, so we are going to devote ourselves to change.” The absolute antithesis of what Berlusconi offered. He said “let’s party.” They got rid of Berlusconi, but it was too late!
The problem with the Italian view of Europe is that they think it offered them good governance and credibility on the cheap—and they didn’t have to do anything. The problem is that is not the way the Germans, and the northerners, think. The Italians united themselves with this bunch of Lutherans and Calvinists—Germans think like that even when they’re Catholic. The French believe they have to behave in the same way, and the Spanish bureaucratic elite have internalized this, because in their view, there is no choice.
The euro is not a free lunch. It’s a binding commitment.