The rejection of a populist government in Italy could further inflame anti-EU sentiment and destabilise the Eurozone.
Europe’s latest head-on collision between the establishment and populism has sparked a political and constitutional crisis in Italy, and threatens to shake both the Eurozone and the European Union.
New elections are likely after President Mattarella effectively torpedoed an anti-establishment coalition waiting in the wings by rejecting its choice of a Eurosceptic finance minister. His appointment of an EU-conformist technocrat to try to form a government in its place will be a red rag to a populist bull.
It appears to illustrate the limits to which an EU nation can challenge the bloc’s economic orthodoxy, and raises questions about the Eurozone’s stability and Italy’s place in the EU.
Sensible economics or democratic vandalism?
Sergio Mattarella argues he is protecting Italy from a potentially chaotic exit from the single currency.
The president explained in a televised address his decision to block the appointment as finance minister of 81-year-old Eurosceptic economist Paolo Savona.
“The uncertainty over our position has alarmed investors and savers both in Italy and abroad,” he said. “Membership of the euro is a fundamental choice. If we want to discuss it, then we should do so in a serious fashion.”
Savona had said he supported EU economic governance rules set out in the Maastricht and Lisbon treaties. But he wanted to reduce Italy’s debt via growth rather than tax rises or spending cuts, and for Europe to be “different, stronger and fairer”.
The two parties which had struggled to form a coalition, the far-right League and the Five Star movement, have accused Mattarella of abusing his office.
“If there’s not the OK of Berlin, Paris or Brussels, a government cannot be formed in Italy. It’s madness,” said League chief Matteo Salvini, vowing to “bring democracy back to this country”.
Five Star leader Luigi Di Maio has called on parliament to impeach the president, for violating the head of state’s duty to be neutral. Although mainly ceremonial, the president does have the power to appoint heads of government and dissolve parliament.
“What’s the point of going to vote, since governments are decided by the credit-rating agencies and the financial lobbies,” Di Maio said on his Facebook page.
Markets' relief shortlived
Financial markets were reassured, at least at first, by Mattarella’s move. Analysts said there was relief that the likelihood of a populist Eurosceptic government, in the Eurozone’s third largest economy, had receded.
Italian banks led a sharp rebound on European stock markets on Monday. After touching a six-month low on Friday, the euro has risen against the dollar.
It had been feared that the populist coalition’s proposals for a flat tax rate, allied to increased public spending, could see a further explosion in Italy’s already soaring debt, breaking EU rules.
However, analysts believe the respite could be temporary. The political crisis in Italy looks set to dominate the markets this week and beyond. The prospect of several more months of uncertainty ahead of fresh elections could lead to financial instability and market turbulence.
“We don’t think this rally can be sustained. Italy has simply bought some time, nothing more,” said Michael Leister, a strategist at Commerzbank.
The price of Italian debt rose on Monday to levels not seen since the aftermath of the Eurozone crisis. The recent debt sell-off, combined with fears about instability in Spain, has raised concerns about the fragility of the Eurozone.
A boost for the populists?
The appointment of Carlo Cottarelli, a former International Monetary Fund (IMF) official, to head a temporary, unelected administration will likely be portrayed by populists as a contemptuous slap in the face for ordinary voters.
Such a solution could only be short term, as most members of parliament have said they would not support such a government.
Opinion polls suggest the populists may well benefit from the latest political turmoil. Support for the League, which won 17 percent of the vote in the March elections, is expected to grow – while Five Star continues to enjoy backing of above 30 percent.
Centre-left and centre-right parties, which performed badly enough in the recent vote, will have their work cut out to do better. The political mainstream is widely blamed by Italians for a sluggish economy, high unemployment and rising poverty – not to mention the migration crisis of recent years.
Italy’s place in the EU at stake
If Cottarelli fails to win parliamentary backing, as expected, elections are expected to follow in September or October.
Italy is no stranger to political turmoil, but some commentators see the current situation as the most serious in the country’s post-war history.
Already, the next election is being touted as a showdown over Italy’s place in Europe – with the distinct possibility that voters will seek even more radical solutions.
“It won’t be an election, it will be a referendum between Italy and those on the outside who want us to be a servile, enslaved nation on our knees,” said the League’s Matteo Salvini.
Wolfango Piccoli, Co-President of the political risk consultancy Teneo Intelligence, says the next election campaign is likely to feature an even stronger Eurosceptic tone.
“Looking further ahead, it is hard to see how Italy can emerge from the ongoing political-institutional crisis in a better place politically,” he said. “The main risk is that the stand-off will further embolden the Five Star, and especially the League. The two populist parties will blame the ‘establishment’ for denying them the right to govern. A narrative that will further polarise society.”