On 1st June Italy's new government was sworn in, ending a week-long political crisis that had rocked confidence in Italy's economy, and sent shock-waves through markets worldwide. Sergio Mattarella, Italy's President, presided over the swearing in of a new Prime Minister, Giuseppe Conte, and an 18-strong cabinet. Mattarella's earlier refusal to accept a cabinet which included as Finance Minister a long-term opponent of Italy's participation in the single currency, had outraged the two parties which had joined to form a coalition government, for each of them the first time to be holding power. But they have come back with an acceptable formula.
The President's intervention, which was entirely in keeping with his constitutional powers and his role, has prevented an immediate collapse of confidence in Italy's ability to govern itself with a minimum of prudence. The stakes remain very high, however. Italy's long under-performance economically, and its high burden of public debt of euros 2.3tn at a ratio of 138% of GDP, has hampered the efforts of recent governments to find a solution that restores healthier growth, and tackles essential structural reforms. Policies of austerity have been unavoidable. The reforms they did achieve, notably concerning the unaffordable levels of state-funded pensions, are now at risk of being reversed.
The two coalition partners are populist parties from opposite ends of the political spectrum, united by their radical instincts and the passionate hopes of their supporters. The Northern League is considered a classic right-wing populist party, with its main target the 600,000-strong population of illegal immigrants, mostly from Africa, who have arrived in Italy over recent years and who continue to come. The Five Star Movement is of a left-wing populist kind, and takes at its target the ineffectiveness of past governments and the claimed corruption of elites, ignoring the part played by over-generous state pensions and payments in creating Italy's massive debt problem.
The Italian voters' massive rejection of austerity, and empowerment of radical political forces promising the earth, has echoes of some early stages of the debt crisis in Greece following the global financial meltdown of 2007- 08. It also recalls the equally wishful and counter-rational rejection by British voters of European Union membership, from which the United Kingdom has gained so greatly, above all from the influx a hard-working and talented generation from other EU countries. The indecision and bad faith of Britain's governing conservatives is in a category of its own, wasting two years in failing to grip the essential impossibility of its own policy.
Italy starts from a different position. Unlike Britain, which until the Brexit referendum was booming, Italy has been struggling to achieve a reasonable level of growth. Popular frustration has a genuine basis. The charges of corruption are code for a wider degree of waste and inefficiency in public administration, though the resistance to reform has consistently come from unionised workforces protecting their own interests, and from the politicians riding on this. The business class in Italy would like nothing more than to end the long stagnation of the Italian economy. Italians do not have the visceral rejection of European identity that swelled the Brexit vote. But they feel deeply betrayed by the other EU member states' failure to share the burden of immigrant flows, and (as several others feel, above all Greece) angry at the effects of massive German balance of payments surpluses, after year consecrated by German dominance of the European Central Bank, which create corresponding deficits in the southern European economies.
Italy now embarks on a path of experimentation with the relaxation of fiscal discipline. Conventional economic thinking predicts it will soon run into terminal problems. Whether the new government and its mix of new ministers and experienced technocrats will have the skill and adaptability to react, and to carry public opinion with it as it scales back its extravagant promises, is the question observers are asking. The Italian public does not want Italy to abandon the euro, nor leave the European Union. For its part, the eurozone and the Union cannot treat Italy with the brutal firmness with which they treated Greece: the Italian economy is large enough to be systemically critical. Both sides will go in for tough talking and brinkmanship in public. The shaky, unlikely coalition in Rome of right and left populists may not survive the impact of real policy choices. A period of uncertainty may extend for years, weakening Italy further. Provided Italy's constitutional system survives the strain, however, there is the possibility in time of a course correction. Now is a time for cool heads.
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