Italian populism: a new challenge to the EU?

19

June, 2018

 

  • Italy’s anti-establishment Five Star Movement and right-wing Lega party have formed a coalition government after months of political deadlock.
  • The new government has raised questions over Italy’s future relationship with the EU.
  • The populist alliance is intent on challenging EU policies on immigration, Russia, spending and taxation.

“Both parties in the new coalition ran on electoral platforms that threaten to bring the government into conflict with the Eurozone and the EU.”

On June 6th, Italy’s new populist government won a parliamentary vote of confidence, officially taking the reins of the Eurozone’s third largest economy. The anti-establishment Five Star Movement (M5S) and the right-wing Lega party agreed to form a coalition government at the end of May, ending three months of political uncertainty after the inconclusive March elections.

A prior attempt to form a government had failed because the president, Sergio Mattarella, vetoed Prime Minister Giuseppe Conte’s choice of finance minister, the ardent Eurosceptic Paolo Savona. Mr Savona, now minister of European affairs, had previously said Italy should have a ‘plan B’ to leave the eurozone. Mattarella feared Mr Savona’s appointment as finance minister would disturb the markets and cause damage to the Italian economy.

After Mattarella’s veto, the two parties pulled out of forming a government. The possibility of another election loomed and market pressures mounted. The yields on Italian government debt (borrowing costs) reached their highest level since August 2012, at the height of the Eurozone crisis. The threat of more intense market pressures, which would have resulted from another election in the summer, was a catalyst for the establishment of the new government.

Voter disaffection with the traditional post-war parties has led to rising support for anti-establishment movements across Europe, but this is the first time they will run the government of a major western European country. Greeting the formation of the government, a spokesperson for the EU executive said ‘we have full confidence in the capacity and willingness of the new government to engage constructively with its European partners’. However, both parties in the new coalition ran on electoral platforms that threaten to bring the government into conflict with the Eurozone and the EU on a range of issues from restricting immigration, to lifting sanctions on Russia and challenging the EU’s budget deficit rules.

The first battleground is likely to be over immigration. Both parties campaigned on the promise of taking a tougher stance on immigration and have insisted that half a million undocumented migrants be deported ‘as a priority’. The new government has already clashed with the EU on this issue. On June 11th, the interior minister and leader of the anti-immigrant Lega, Matteo Salvini, refused to open Italy’s ports to a rescue ship carrying over 600 migrants. This sends a clear message to the EU that Italy will no longer accept being the entry point for refugees and migrants into Europe from the Middle East and Africa.

The new administration is also expected to challenge the EU’s sanctions on Russia, which were implemented after Russia’s annexation of Crimea in 2014. In his debut speech to the Italian parliament, Prime Minister Conte said Italy ‘will be the advocates of an opening towards Russia, a Russia which has consolidated its international role in recent years in various geopolitical crises.’ Italy becomes the second EU power, after Austria, to criticise the EU’s stance on Russia. It is too early to say whether this new outbreak of goodwill towards the Kremlin will lead to any significant changes in relations between the West and Russia.

The government’s fiscal plans include tax cuts and a host of measures that will increase spending, threatening to send Italy’s budget deficit spiralling out of control. A significant part of the agenda, according to UBS bank, will be the introduction of a flat tax. This would introduce two flat tax rates for households and corporations at 15% and 20%, depending on households’ income level. Other costly policies include a universal basic income of €780 per person per month for everyone falling below the poverty line, including the unemployed, and a repeal of a VAT increase for next year.

The fiscal costs of implementing this agenda would be substantial. The UBS predicts an overall annual cost of 4.4% of GDP at best. The former IMF director, Carlo Cottarelli, is more pessimistic, claiming that the government’s tax cuts and spending spree could cost 6-7% of GDP per year. The EU’s fiscal rules do not provide any leeway for Italy to increase spending. Excessive spending above the EU’s 3% of GDP deficit limit could place Italy back under an Excessive Deficit Procedure. This would require Italy to provide a plan of corrective action and policies to follow, with deadlines for their achievement. This could ultimately lead to the EU imposing sanctions (fines) on Italy if it failed to comply.

However, Italy is not leaving the Eurozone any time soon. The new finance minister, Giovanni Tria, has stated that Italy is ‘not discussing any proposal to exit the euro’. Nonetheless, the new alliance’s programme contains enough to spark conflict with the EU and the Eurozone, on issues such as higher spending, lower taxes, immigration and Russia. Just as the Brexit negotiations threaten to get tougher, this is another headache the EU could do without. For the first time, it will have to deal with a government in one of its founder member states that is intent on challenging many of its policies.

 

Written by Tanya Kekic. Edited by Abdi Buwe. 

Warwick Congress Blog

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