The ideological shifts, economics and geopolitics of the Italian elections

The agenda of Italy’s new anti-liberal, Eurosceptic and pro-Russian government could have significant ramifications far beyond Italy

This post elucidates on the three key implications following the 2018 Italian general elections and the recent appointment of Italy’s new government: the consolidation of anti-liberal ideologies, the impact of a potential Italian exit from the euro on global financial stability, the geopolitical equilibria between Russia and the EU.

After months of negotiations, an agreement has finally been reached between the right-wing League, the anti-establishment 5 Star Movement and the President of the Republic, paving the way for Italy’s new coalition government. During the last two weeks, a contention arose about the proposed appointment of economist Paolo Savona to lead the Ministry of Economy and Finance. President of the Republic Sergio Mattarella (who is constitutionally required to nominate the government) had vetoed the appointment of Savona on the basis of his known criticism of the euro, as well as for his proposal on how Italy could leave the single currency; issues that were not discussed during the last electoral campaign. To move on with the coalition pact, the League and the 5 Star Movement eventually agreed to nominate someone else at the Ministry of Economy and Finance, while however maintaining Savona in the executive as the Minister of European Affairs. So, how does the new government stand ideologically? And does it represent a true, anti-establishment shift?

On the one hand, the new coalition government represents a markedly Eurosceptic, right-wing and anti-liberal shift from its pro-European, centrist and liberal predecessor. For instance, the League’s new Minister for Family and Disabled Policies Lorenzo Fontana has previously held homophobic, anti-abortion and pro-life positions. The League’s leader and now Interior Minister Matteo Salvini has already called to cut significant amount of financial resources allocated for migrants and refugees. 5 Star’s appointment for Minister of Health Giulia Grillo has proposed to abolish mandatory vaccinations for children. On the other hand, the government has also retained a distinctive ‘technocratic’ flavour to it, with a number of non-elected appointments and establishment figures to hold key positions. Law professor Giuseppe Conte will lead the executive as Prime Minister, economics professor Giovanni Tria will lead the Ministry of Economy and Finance, economics professor and former Minister Paolo Savona is at the Ministry of European Affairs, and law professor, former Minister and high-level EU official Enzo Moavero will be Italy’s Foreign Affairs Minister.

The ‘technocratic’ component of the new government is a clear strategic choice to employ insiders and experts to better negotiate Italy’s demands for EU reforms. Indeed, both the League and the 5 Star Movement want to renegotiate the EU’s fiscal rules, deemed too tight and to have impaired Italy’s economic recovery from the financial crisis. As it doesn’t look like Brussels, nor Berlin or Paris, are keen to renegotiate the EU’s rules on budget spending, the League/5 Star coalition is bidding on the use of experts as leverage, thanks to their knowledge of the EU’s mechanisms and their established relationships with their European counterparts. Whether this will lead to an irreparable clash with the EU remains to be seen, particularly due to the very likely disagreements that will sooner or later emerge between the more moderate and radical wings of the 5 Star Movement itself. What about the euro?

With respect to the relationship between the Italy and the EU, the chances of Italy leaving the euro, though still remote, have never been so high. The League and the 5 Star Movement together obtained more than half the seats in the two houses of the Italian Parliament during March’s elections. In the past, both parties have openly advocated for Italy’s exit from the single currency, on the basis that the EU’s fiscal rules are too tight and have impaired the country’s economic recovery. Although both parties backtracked on their previous claims and did not openly campaign to leave the single currency during these elections, the current Parliament and Government are the most Eurosceptic post-war Italy has ever seen. As the chances of Italy leaving the euro are higher than ever, what consequences would such an event have on global financial stability?

Italy has one of the Eurozone’s largest government debts, currently standing at around €2.4tr, or 133 per cent of GDP. For comparison, Greek sovereign debt (which caused great concern during the Eurozone crisis), stands at roughly €0.34tr (at over 170 per cent of GDP). Crucially, putting to one side questions regarding debt sustainability, Italy’s government bonds alone underpin around 10 per cent of the guarantee (collateral) in the Eurozone’s interbank lending market, which is the key market segment where banks access short-term funding. In short, Italian government bonds are of vital importance in the provision of liquidity in the Eurozone’s financial market. Should Italy actually leave the euro, investors would likely begin a massive sell-off of Italian government bonds, due to the lack of guarantee that Italy’s new currency would maintain its value in the future. Thus, aside from driving the cost of Italy’s public debt servicing to the roof (which, however, could in part be offset by devaluing the new currency), Italy’s exit from the euro could severely damage the Eurozone’s liquidity in financial markets. Such developments would likely lead to a sudden halt in credit, which may trigger a financial crisis. Such a financial collapse could hardly be contained by the European Central Bank, however, having exhausted most of its monetary policy tools and without sufficient resources to purchase enough Italian government debt to make any significant difference. Given the interconnections between the Eurozone and other global markets, a new Eurozone crisis could quickly spread to the US and Asia, triggering a full-blown global financial crisis.

Finally, there is a dimension that is not often discussed: the League’s relationship with the Kremlin. In March 2017, United Russia, the largest pro-Putin party in the country, signed a cooperation agreement with the League. The agreement with the League followed similar moves that Russia had with other far-right parties and anti-immigration parties in Europe, including the Freedom Party of Austria, and Alternative for Germany (AfD). Broadly speaking, these initiatives aim at destabilising liberal values and parties in Europe, in order to delegitimise western sanctions against Russia, following the 2014 annexation of Crimea. On a more personal level, League leader Salvini has repeatedly praised Russia’s president Vladimir Putin, who in return provided the League with support through the Italian division of Rossotrudnichestvo, a federal agency under Russia’s Ministry of Foreign Affairs.

Unsurprisingly, during the League/5 Star government talks, the League strongly pushed to create a pro-Russian government agenda. Indeed, in the final coalition document between the League and 5 Star, Russia is recognised as a commercial and strategic partner, and the document calls for EU economic sanctions on Russia to be lifted. This point was reiterated by Prime Minister Conte in Parliament, who also came in favour of President Trump’s call to re-admit Russia to the G7. Whereas Italy has always held deep diplomatic and commercial relationships with Russia, this would be the first time where a government in western Europe is simultaneously strongly Eurosceptic and pro-Russian. Should the relationship between such a pro-Russian Italian government and the EU reach a very low-point, the geopolitical equilibria in the Eurasian region would certainly swing in favour of Russia.