What Italy’s economic woes mean for Sunday’s vote

These days, no one is more negative about the European economy than the Italians. In Sunday’s general elections, here’s how Italy’s hard economic times will likely factor.

A decade after the start of the euro-zone crisis, Italy’s gross domestic product has yet to return to its 2007 level. Unemployment is around 11 percent, while youth unemployment is at a staggering 32 percent. It’s perhaps no surprise that at least 1.5 million Italians have left the country since 2008.

Italy, Europe’s fastest-growing economy between 1950 and 1990, has hardly been growing for two decades. As euro-zone membership does not allow the country to devalue its currency, two economic weaknesses have become particularly obvious:

  1. The reliance on exports like clothing, furniture, and footwear, vulnerable to competition from developing countries.
  2. The country’s enormous public debt.

Italy’s next government will have a mountain to climb. The main competitors are Silvio Berlusconi’s center-right alliance, Matteo Renzi’s center-left alliance and the anti-establishment Five Star Movement. Whoever emerges victorious will have to wrestle not just with the normal challenges to economic growth, but also with Italy’s complicated relationship with the euro.

The dispute over the euro

Prolonged economic stagnation, followed by a double-dip recession during the euro-zone crisis, has made the euro a major bone of contention. In recent polls, 58 percent of Italians say that the country’s current economic state is “bad,” and 40 percent think that “having the euro is a bad thing.”

Still, ahead of the March 4 election, Italy’s main political players toned down criticism of the euro — in a campaign that has been consumed with the issue of immigration from outside Europe. Despite earlier threats, no major political figure currently calls for an “Italexit.”

The center-right alliance is ahead in the pre-election polls. Its largest party, Berlusconi’s Forza Italia (FI), has campaigned in support of Italy’s euro-zone membership and with the stated intention to respect E.U. budgetary rules, though proclaiming these points at the same time “debatable.”

This position contrasts with Berlusconi’s previous call for the reintroduction of the lira as a parallel currency. FI’s main ally, the radical-right Northern League (LN), is even more ambivalent. While its leader Matteo Salvini stopped campaigning for Italy to abandon the euro, he names the common currency as an “error” that needs to be corrected.

The anti-establishment Five Star Movement (M5S) has shaken up Italian politics since emerging in 2013 — and has shifted some of its own positions. Initially campaigning on social politics, environmentalism and anti-corruption, M5S has recently promoted restrictions on immigration, in line with Italy’s political mainstream.

In 2016, M5S founder, the comedian Beppe Grillo, proposed a nonbinding referendum on Italy’s euro-zone membership. However, the current party leader, Luigi Di Maio, recently dismissed the idea of leaving the euro, calling a referendum “a last resort which I hope to avoid.” The M5S 20-point manifesto released in January 2018 omits any mention of a euro referendum.

The governing Democratic Party (PD) dominates the center-left alliance, heir to the government that in the 1990s qualified Italy for euro-zone membership at the 11th hour. Having backed all austerity measures since 2011, the PD is perceived as the staunchest supporter of the common currency. However, it is trailing both Berlusconi’s center-right alliance and M5S in pre-election polls.

A ‘Euroskeptic’ government in Rome?

It’s likely that none of the three parties will claim the votes required for a parliamentary majority, making government formation tricky — although the center-right still has a chance to do so.

A continuing involvement of the center-left PD in Italy’s next government would produce a huge sigh of relief in Brussels. PD’s survival in government is most likely as a partner of Berlusconi’s FI in a “Grand Coalition” — in disregard of their electoral alliances today.

Still, a role for Italy’s Euroskeptic parties — M5S or LN — in the next government is not completely off the table. Would either party, if in government, be likely to call for an end to Italy’s euro-zone membership? Probably not, but they would be likely to seriously question the E.U.’s stringent 3 percent deficit limit.

Can there be a return to economic growth?

Even if the election produces a more or less stable government, the key economic pledges of Italy’s major political players seem insufficient to address the country’s economic challenges. Domestically, issues such as low labor productivity, public sector inefficiency and the growing education gap with the other industrialized countries demand urgent responses.

Instead, even radical proposals — such as FI’s introduction of a 23 percent flat tax or the doubling of the minimum pension, M5S’s citizens’ income and a universal pension or LN’s 15 percent flat tax and proposed tariffs on imports to protect jobs do not seem sustainable. While some of these policies might bring important short-term benefits to specific sectors of the society, they clash with the stringent E.U. fiscal requirements and don’t address Italy’s structural weaknesses.

Moreover, the long-term future of Italy and the euro depends on an overhaul of the euro-zone institutions. Being part of the euro club means Italy cannot devalue its currency to boost exports — which so far has made austerity, or “internal devaluation”, the only option to do so.

While there has already been some debate on euro-zone reform, some issues might become more important in the next few years: Will Germany and other Northern European member states back down from the austerity mantra? Will they introduce Eurobonds as a guarantee for the debt of Southern European states? Will raising wages in the North create demand for Southern European exports?

Certainly, these questions are difficult to resolve. But if no answers emerge, Italy might simply muddle through until the next crisis hits.

Fabio Bulfone is a researcher at the Robert Schuman Centre for Advanced Studies of the European University Institute in Florence. He works on comparative political economy and European integration. Find him on Twitter @FabioBulfone.
Manès Weisskircher is a researcher at the TU Dresden (MIDEM — Mercator Forum Migration and Democracy) and at the European University Institute in Florence. His research interests include comparative politics and political sociology. Find him on Twitter @ManesWeissk.

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