Italy: This Time is Different

Seasoned observers of Italian politics will tell you that there is a fairly consistent pattern to political crisis. The pattern starts with infighting among the governing coalition; it accelerates suddenly when one of the coalition partners ‘pulls the plug’ on the government; and then things slow down again as the various stakeholders realize how much is at stake for them personally if they let things fall apart. Parliamentary seats are prestigious, the salaries are high, and the pensions are generous provided the members just stay in post long enough to qualify. More important, real crisis comprises a lot of work with very uncertain pay-offs to be gained from an often-fickle electorate. Meanwhile, bad things can happen to the country’s economy, particularly vis-à-vis the banks and bond markets. In such a context, it is only reasonable to expect that cooler heads will prevail. Given the possible threat that an Italian meltdown would pose for the future of the euro (and hence also the European Union), we should all hope these observers are right. Nevertheless, there are four good reasons to believe that this time is different.

Beyond Left and Right

First, the Italian electoral system is built on the assumption that the country will divide more or less equally into a competition between the left and the right. The reason has to do with the interaction between the electoral system and the requirement that any government has a majority in both chambers of parliament. Roughly two-thirds of the seats are allocated proportionally; the remaining seats are won in first-past-the-post (or plurality) electoral contests. The proportional seats are a gift to the smaller parties that litter the fringes of the Italian political spectrum; the plurality seats encourage even smaller parties to form pre-election coalitions – and hence encourage a polarization between the left and the right. Normal Italian crises come at the juxtaposition of these two influences, where governments form based on the pre-electoral coalitions only to fall apart when one or more of the smaller parties decide to pull out. So long as the general pattern of competition remains the same, however, no one has a strong desire to call for new elections because everyone knows they will end up in much the same situation. It is far better in that case to find some way to form a new government, even if only to get past the time required to qualify for a parliamentary pension.

The difference today (and since 2013) is that the polarization between the center-right and center-left can no longer be taken for granted. Instead, the parliament is divided into three groups: center-left, center-right and ‘none of the above’ (which is mostly comprised of the Five Star Movement, or M5S). In such a context, there is no guarantee of a center-right or center-left majority to form the government. Indeed, the government that has just collapsed emerged out of a strange union of one of the more right-wing parties (Matteo Salvini’s Lega) and M5S. The fact that such a coalition government would fall apart comes as no surprise. The coalition that could replace it is much harder to imagine, particularly given the electoral system. The proportional contests still favor the small parties, while the first-past-the-post contests introduce a new element of volatility. For the first time, it is conceivable that the political right could obtain an outright majority without support from the more moderate center. This is what Salvini clearly wants. It is also conceivable that early elections may return a hung parliament in either or both of the chambers. Neither of these are good alternatives. But the distance between the groups in the existing parliament is potentially too great for them to form a workable, alternative coalition. That problem is unprecedented. The existing members of parliament may want to hold on to their seats, salaries and pensions, but they may not be able to make that happen.

A Complicated Political Economy

The second big difference is the complexity of the economic agenda. In a sense, this problem flows from the first. Past governments tended to have more coherent economic programs. Centre-right governments tried to cut taxes and increase tax expenditures, while center-left governments tried to find revenues to strengthen public services. When either side ran into trouble, they simply had to moderate their ambitions. This was not always easy and sometimes the conflicts were hugely divisive. The last government headed by Silvio Berlusconi is one good illustration; the government headed by Romano Prodi that Berlusconi’s last government replaced is another. But success was always a matter of determination, and so, if a political solution was not available, then the president of the Italian Republic could always appoint a technocratic government to do the heavy lifting.

The problem this time around is that Italy has had fourteen months of economic policy pointing in conflicting directions – with huge increases in entitlements promised by M5S and huge tax cats promised by Lega. Both sides of the coalition ultimately moderated their ambitions, but they nevertheless succeeded in laying the foundations. As a result, a widening gap has opened up between expenditures and revenues. The current government promised to fill that gap by raising value-added taxes, a promise that past governments have made as well – and one that no government has honored. The challenge this time around is to find a way to moderate the promises made by both sides – M5S and Lega – in order to avoid the automatic tax rise. That challenge could have been met when both sides were in government; it could even have been met if both parties were willing to lend their support to a technocratic administration. It is much harder to see how it will be managed if either party is in the opposition and gearing up for elections. The more responsible party that supported any cuts would be antagonizing their own base and galvanizing support for their opponents at the same time. The most likely result in such a context is inaction.

Europe as a Vincolo Esterno

A third big difference is the European context. The European rules for macroeconomic policy coordination have become more formalized in the aftermath of the global financial crisis. That is why Italy has such a rigid calendar for conducting its fiscal negotiations – as do the other EU member states. That formalization comes with a new political sensibility about how macroeconomic policymaking should be conducted. There are still some in European institutions that want to offer flexibility to member-state governments in difficult political situations, but there are also others that believe in the importance of maintaining fiscal discipline and enforcing what they see as ‘tough love’ (and what the governments on the receiving end perceive as EU-enforced austerity).

This new pattern of macroeconomic policy coordination is particularly important in the Italian context because of the way Italian politicians have for so long deflected responsibility for making tough political decisions on to the EU, as a kind of ‘external constraint’. This deflection worked in the past, making it easier for coalitions to moderate their own economic ambitions or for parliamentarians to throw their support behind technocratic governments acting in the interests of the country. Now, however, this external constraint has less legitimacy both because it underscores the amount of discretion in the hands of European bureaucrats that should be held by Italian politicians, and because it reveals the condescension toward Italy expressed in other countries. Former Dutch finance minister Jeroen Dijsselbloem’s comment about southern Europeans wasting their money on wine and women is probably the most outrageous illustration, but it is hardly isolated. As a result, there is a growing sense among Italian politicians that they have to show they can push back against European macroeconomic policy requirements rather than embracing them as necessary. Salvini takes this to the extreme form and plans to campaign against Europe and in favor of national sovereignty. This promises to set up a conflict between Italy and the rest of Europe that is qualitatively different. Even if Italian policymakers ultimately back down, they will generate a huge amount of uncertainty along the way.

Conditional Backstop

This is where the fourth big difference becomes important. For a long time, Italy operated without any formal European support or backstop. Then, during the financial crisis, the lack of a European backstop became critically significant. Later, in 2011, international investors sold off their exposure to Italian government bonds and threatened to bring economic ruin to the country – this is why Berlusconi’s last government fell. The point to note, however, is that the end of Berlusconi did not bring stability to the markets. What stabilized Italian bond markets was the introduction of long-term refinancing operations by the European Central Bank (ECB) in December 2011 and February 2012. This made it possible for Italian banks to provide a backstop for Italian sovereign-debt markets, bringing some brief respite. In March 2012, however, the markets again started moving against Italy, stopping only when the ECB president, Mario Draghi, promised to do whatever it would take to safeguard the single currency. The ECB became the backstop, and the market rout ended.

Now the ECB is supported by an array of other European institutions including, most importantly, the European Stability Mechanism (ESM). Hence the backstops for Italy are much more impressive than they were during the last crisis. This should be a difference in a positive sense. The problem is that in order to access those backstops, Italy needs a government with full constitutional powers and majorities in both chambers of the Italian parliament. And, critically, that government must be ready to accept European constraints on Italian macroeconomic policymaking. Without that conditionality in place, Italy cannot access support from the ESM and it will not receive outright support from the ECB. This does not mean that support is beyond Italy’s reach. Given enough time, Italian politicians will get organized in their own interests and those of the country’s. What it does mean, however, is that time is not on Italy’s side. If the political crisis translates into an economic crisis, politicians will have to act very quickly in order to create a government of national unity empowered to negotiate and accept European conditions for assistance. Those same politicians will also have to accept the consequences of their actions in terms of the complex three-way competition for support and influence once, and when, Italians finally go back to the polls.

Not Dire, Just Different

None of this is to say that Italy will not be able to navigate the current crisis. The point is only that navigating this crisis will be different from navigating the crises of the past. The dynamics have changed with the new cleavage in the Italian electorate; the economic agenda has become more complex; relations with Europe have become more complicated; and there are now more formal requirements for gaining European assistance. Although seasoned observers of Italian politics are probably right to push back against any sense of hysteria or panic, it is still worth emphasizing that this time really is different.

This piece was originally published on the Survival editors’ blog at the IISS. For the edited version, go here.  The image used is borrowed from the IISS website.