Aug 14, 2019 | 16:05 GMT

4 mins read

Italy: A Bid to Block Early Elections Buys the League's Rivals Time

The Big Picture

Italy has the highest debt in the eurozone in absolute terms and the second-highest in relation to its gross domestic product. Its substantial debt makes the financial market especially sensitive to Italian political turmoil that could increase the risk of a default threatening the continuity of the eurozone. While a default is not currently likely, a lingering crisis would do little to appease concerns about the future of the third-largest economy in the eurozone.

What Happened

Last week, the leader of the right-wing League party, Matteo Salvini, generated a political crisis in Italy by ending his coalition agreement with the anti-establishment Five Star Movement over policy disagreements. Salvini sought to trigger an early general election in which he calculated that League would perform strongly. But Salvini's political rivals are working against him. The Five Star Movement and the center-left Democratic Party (PD) on Aug. 13 blocked a League motion in Parliament to hold a no-confidence vote against Prime Minister Giuseppe Conte on Aug. 14. Instead, the parties scheduled speeches by Conte on Aug. 20 and 21 in both chambers of Parliament, buying themselves some time to work out a deal to thwart a general election.

Why It Matters

The League insists that it will push for a no-confidence motion against Conte on Aug. 20. But even if the prime minister loses it or decides to resign, it would not necessarily lead to a general election. President Sergio Mattarella instead could ask the parties in Parliament to try to form a new government. While PD Secretary-General Nicola Zingaretti opposes joining a government with the Five Star Movement, other prominent members of his party, including former Prime Minister Matteo Renzi, support such a deal. The move to delay the no-confidence motion demonstrates that further cooperation is possible.

A new governing pact could take several forms, whether a formal power-sharing alliance, a minority government led by the Five Star Movement with PD support in Parliament or a technocratic government led by nonpolitical figures. The duration of the alliance would also be subject to negotiation. For a deal to work, however, the PD would have to remain united. Splits within the party could mean that the anti-Salvini camp would need to seek votes from other parties to reach a Parliamentary majority. This explains the League's negotiations with former Prime Minister Silvio Berlusconi's Forza Italia party for a deal under which they run together in a general election; Salvini wants to prevent Berlusconi from siding with the anti-League camp.

If Parliament fails to appoint a government, elections could happen as soon as October. But two issues could delay them. The first is a proposal by the Five Star Movement to reduce the number of lawmakers in Parliament, which would require constitutional reform. The League has offered to support the plan, which is popular among many voters, if it is approved immediately. But reforming the Italian Constitution — a lengthy process that could take months and might even require a referendum — would delay a general election. The second issue is Italy's commitment to presenting a 2020 draft budget to the European Commission by Oct. 15; Mattarella would be likely to push for a budget draft before any election.

Markets Will Be Watching

Financial markets are sensitive to political turbulence in Italy. The spread between Italian and German bonds, a key indicator of market confidence in Italy, jumped to 240 points in early August from roughly 190 in late July. This is far from dangerous levels — Rome has said the spread should reach some 400 points before Italy is at serious risk of default — but serves as a reminder that investors are watching closely. Credit ratings agencies will issue their updated reports on Italy in September and October, and negative assessments could also lead to higher borrowing costs for Rome. The chances of financial contagion in other countries in Mediterranean Europe, while still low, could increase if Italy's political crisis remains unsolved.

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