Italy's Government Hangs by a Thread

5 MINS READAug 8, 2019 | 21:45 GMT
Italian Deputy Prime Minister and Interior Minister Matteo Salvini speaks Aug. 7, 2019, in Sabaudia, Italy.

Italian Deputy Prime Minister and Interior Minister Matteo Salvini speaks Aug. 7, 2019, in Sabaudia, Italy.

Stratfor's geopolitical guidance provides insight on what we're watching out for in the week ahead.

The Italian government is hanging by a thread. The collapse of the coalition between the right-wing League party and the anti-establishment Five Star Movement seems imminent after League leader Matteo Salvini asked Aug. 8 for an early general election. But even if the League formally leaves the coalition government, several institutional steps will have to take place before an election is called.

The Big Picture

Stratfor's 2019 Third-Quarter Forecast identified Italy as the main source of political and economic instability in the eurozone. In the coming days, markets will be watching events in the country closely. The combination of low growth, high debt and an unstable government makes Italy a problematic country for the currency area.

The Options on the Table

Frictions between the League and the Five Star Movement have been escalating for weeks. The final straw was an Aug. 7 vote in the Italian Senate, when Five Star Movement lawmakers voted against a project to build a high-speed train connection between Italy and France, which the League supports. Salvini met with Italian President Sergio Mattarella on Aug. 8 and said the League was left with little choice but to ask for a general election to appoint a new government.

Salvini's decision puts Mattarella at the center of the crisis because the decision to dissolve Parliament and call an election is in the president's hands. In recent days, Mattarella has spoken against early elections and defended the need for institutional stability. Mattarella now has several options. He can ask the League and the Five Star Movement to find a compromise and appoint a new government, probably with a different composition. (Earlier in the day, Italian media suggested that the League was pushing for a Cabinet reshuffle to, among other changes, replace Economy Minister Giovanni Tria, a technocrat, with a new minister closer to the League's Euroskeptic ideas.) But this scenario seems difficult considering the bad blood between the League and the Five Star Movement. Five Star Movement leader Luigi Di Maio asked the League to remain in the government at least until September when the Italian Parliament is scheduled to vote on a proposal to reduce the number of parliamentarians. This is a strategy to validate the Five Star Movement's anti-establishment credentials and to pressure the League to stay in power and approve a measure popular with many Italians.

Alternatively, Mattarella could ask other parties to form a government. A coalition between the Five Star Movement and the center-left Democratic Party would control a majority of seats. But relations between these parties are tense, and Democratic Party secretary-general Nicola Zingaretti said Aug. 8 that his party is ready for an early election. The Five Star Movement could also try to lead a minority government, but that would require support from other parties at least to appoint the government. Other options, such as a technocratic government, are also on the table, but they would all require support from a majority of parties in parliament.

The earliest possible date for a general election in Italy is in October, a problematic time, as Rome is expected to present its budget plans to the European Commission by Oct. 15.

Should the parties fail to appoint a government, the president would have to dissolve Parliament and call for an election within 45 to 70 days. This means that the earliest possible date for a general election in Italy is in October. This is a problematic time, as Rome is expected to present its budget plans to the European Commission by Oct. 15. Mattarella may try to keep a caretaker government in place at least until the budget is presented to Brussels, but this would still require a majority of lawmakers supporting that plan. If an election finally happens, opinion polls suggest that the League stands a good chance of winning it and then forming a coalition with like-minded parties in the center-right and the far right. 

Markets Will Be Watching Closely

Financial markets, meanwhile, will be watching events in Italy closely. While the country's borrowing costs are well below the levels they reached at the peak of the financial crisis in late 2012, they are still higher than they were before the current government took over. Markets have proved sensitive to political developments in Italy in recent months, with Rome's bond yields jumping every time there have been doubts about the continuity of the government. This is not a minor issue in Italy, where debt stands well above 130 percent of gross domestic product.

A line graph comparing the economies of Italy and the eurozone.

Credit rating agencies will also be standing guard, ready to downgrade Rome's rating if they believe the government's fiscal policies will harm the Italian economy. Moody's will release its updated assessment of Italy on Sept. 6, followed by Standard & Poor's on Oct. 25. Last year, Moody's downgraded its rating of Italian debt to just one notch above junk status, or the status where it would no longer be considered investment grade. As a result, Italy will remain one of the main sources of political and economic risk in the eurozone for weeks, if not months, to come.

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