snapshots

Aug 29, 2019 | 17:58 GMT

4 mins read

Italy: A Coalition Deal Reduces the Heat on Rome's Political Crisis

(Stratfor)
The Big Picture

Italy's latest political crisis opened the door for an early general election that the Euroskeptic League party could have won. But now that the Five Star Movement and the Democratic Party have agreed to join in a governing coalition, Italy has at least, for now, avoided appointing a government that would push to leave the eurozone. But another political crisis could be right around the corner. 

What Happened

After three weeks of turmoil, Italy's latest political crisis appears to be ending. On Aug. 29, Italian President Sergio Mattarella gave Prime Minister Giuseppe Conte a mandate to form a new government between the anti-establishment Five Star Movement and the center-left Democratic Party. A vote in the Italian Parliament to confirm the new government is expected to take place next week. 

Why It Matters

The alliance has delayed prospects of an early general election for at least a few months. This means that the League party (which, according to polls, would have won an early vote) will not soon ascend to power, reducing the likelihood of an Italian exit from the eurozone. Unsurprisingly, the news buoyed financial markets, sending the yield gap (or "spread") between Italian and German bonds down — a key indicator of investor confidence in Italy's ability to pay back its debt. 

The Challenges Ahead 

But for the Five Star Movement and the Democratic Party, deciding to work together was the easy part; the real test will be putting their new government into motion. One of the first challenges to their unity will arise almost immediately. The Five Star Movement plans to submit the question of its participation in the new government for approval by its members via the online network the party uses to consult supporters on policy decisions. Surveys suggest that the party's members are split over the prospect of a coalition with the Democratic Party who, in their eyes, represents the political elites that the Five Star Movement has attacked for years. Should party members reject the deal, the Five Star Movement's leadership will be forced to consider abandoning the alliance — a decision that would raise the odds of an early election.

The two parties' social spending policies risk drawing strong criticism from the European Union in October when Italy presents its 2020 budget.

In parallel, the new allies will also have to soon decide who will fill Cabinet positions and, more importantly, settle on a joint government platform. Reaching a consensus on immigration policy will likely prove to be one of the fledgling coalition's biggest challenges. The Democratic Party wants a radical change from the policies of Italy's previous government, which often closed the country's ports to nongovernmental organizations that ferry migrants into Europe. And while this policy was largely the League's doing, it also proved popular among some Five Star Movement voters. This may make the party hesitate to accept a total reversal. There's also a chance the new allies will clash over institutional reforms, such as the Five Star Movement's proposal to cut the number of lawmakers in Parliament, an idea that the Democratic Party has criticized.

That said, the parties should still be able to find common ground on economic policy, since each supports increasing public spending, particularly on programs to assist low-income families. Additionally, both want to cancel the increase in the value-added tax that's scheduled to take effect in 2020 and risks raising the cost of living. 

However, the parties' shared economic vision could create problems with the European Union. Italy must present its 2020 draft budget by Oct. 15, at which time the European Commission will likely ask Rome to reduce its deficit. Thus, the heavy social spending policies that the parties both support will risk drawing strong EU criticism. A compromise is possible, but pressure from Brussels could exacerbate the governing parties' ideological differences and throw Italy right back into another political crisis. 

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