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Jul 4, 2013 | 10:30 GMT

Italy's Political Uncertainty


Five months after Italy's February general elections, the country remains mired in political uncertainty. On July 4, Prime Minister Enrico Letta will meet with the main parties supporting his Cabinet hoping to achieve political consensus to allow for the survival of the Italian government. None of the parties that support Letta are interested in early elections, and the Italian government is unlikely to fall in the next quarter. However, between August and October, the Italian parliament must approve substantial reforms, which will test the government's political strength and its chances of survival in the long run.

Letta's government is mainly supported by three groups in parliament: Letta's center-left Democratic Party, former Prime Minister Silvio Berlusconi's center-right People of Freedom and former Prime Minister Mario Monti's centrist Civic Choice. This unusual coalition of Italy's largest mainstream parties was formed in late April, after the February elections led to a fragmented parliament and no party could form a government independently. Notably, this coalition left out the anti-establishment Five Star Movement, led by former comedian Beppe Grillo.

The coalition government has short-term and long-term goals. In the short term, the Italian government promised to implement economic reforms to pull Italy out of recession and create jobs. According to the Organization for Economic Co-operation and Development, the Italian economy will contract by 1.8 percent this year. A July 1 report by the Italian Institute of Statistics revealed that unemployment reached 12.2 percent in May, the highest level since records began in 1977.

In the long term, the government is expected to approve amendments to the Italian Constitution and the electoral law. Both reforms will try to create a more stable political system, to reduce the fragility that characterizes most Italian governments. According to the time table laid out by Italian President Giorgio Napolitano, these reforms should be ready by mid-2014. After that, Italy should call new elections with the new political and legal framework in place.

Both sets of goals face significant obstacles. The modification of the constitution and the electoral law are extremely sensitive issues, because the lawmakers will be in charge of deciding who will have the power in the country. For example, the current electoral system grants bonus seats to the largest party in the lower chamber, but not in the Senate. This prevented the Democratic Party from forming a government on its own and forced it to seek an agreement with the People of Freedom. Electoral reform was also a priority of Monti's government in 2012, but the parties did not reach an agreement. Over the next year and a half, each party will seek a reform that benefits them, so the matter will remain highly contentious.

The short-term goals are equally controversial, and August, September and October will be critical for the future of the Italian government. Three significant issues will be discussed: the reform of the country's value-added tax, the future of an unpopular real estate tax and a reform of the pension system.

During the election campaign Berlusconi promised that his party would lower the value-added tax and a controversial real estate tax (known in Italy as IMU). After the elections, he conditioned his support for the government on the fulfillment of both promises. The former prime minister won a temporary victory, because an increase in value-added tax from 21 to 22 percent (which was supposed to take place July 1) was postponed until October 1. As a result, the government will have to decide whether the value-added tax is increased or not before the end of September.

Between mid-August and early September, the government must also decide whether to reform or eliminate the tax on real estate. This tax was put in place during Monti's government and was a part of austerity measures designed by the EU Commission. In May, the EU Commission announced that Italy had met its budget deficit targets, and Rome was withdrawn from the oversight process that Brussels applies to countries with high deficits. Any reform of the current tax system will force the Italian government to seek alternative ways to raise money.

Finally, Labor Minister Enrico Giovannini said that the government will debate a reform of the pension system between September and October. The main point to discuss will be the situation of those workers who, after a reform implemented in 2012, left their jobs but received no pension. According to official statistics, about 65,000 people fall into this category, and other estimates place the figure even higher.

In the short term, the Italian government will not fall. The center-left has been weakened by a leadership crisis following the resignation of its general secretary Pier Luigi Bersani. The Florence Mayor Matteo Renzi, who lost the primary elections to Bersani in 2012, will likely compete for the leadership of the Democratic Party but has yet to gain the support of all of its factions.

The center-right was hit by a recent court decision to sentence Berlusconi to seven years in prison and knows that its political leverage depends on its permanence in the ruling coalition. The People of Freedom will spend the summer designing its strategy to deal with Berlusconi's delicate situation. The party will increase its anti-austerity and anti-German rhetoric, but will remain in government. Isolated from the government, the Five Star Movement will also seek to redesign its strategy after several lawmakers left the party and its popularity fell.

All these issues ensure that the Italian government will survive for at least the next quarter. Berlusconi has two more opportunities to appeal before the sentence against him becomes final, so the Party of Freedom will support the Italian government until it has more clarity regarding the future of its leader. The Democratic Party, meanwhile, will focus on its internal crisis before considering new elections. If Letta's Cabinet overcomes these challenges in between August and October, the government could remain in place for the rest of the year.

Italy's Political Uncertainty
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