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Aug 21, 2019 | 17:44 GMT

7 mins read

The Three Political Outcomes That Await Italy

Italian Prime Minister Giuseppe Conte announces his resignation in the country's Senate on Aug. 20, 2019, as Deputy Prime Minister Matteo Salvini gestures beside him.
(SIMONA GRANATI - Corbis/Getty Images)
Stratfor's geopolitical guidance provides insight on what we're watching out for in the week ahead.

Italy's coalition government has collapsed, but the country might not be going to early elections just yet. After almost 15 months in power, Italy's coalition government between the anti-establishment Five Star Movement and the right-wing League officially ended on Aug. 20, when Prime Minister Giuseppe Conte presented his resignation to President Sergio Mattarella. Conte's decision came two weeks after League leader Matteo Salvini demanded an early general election due to policy disagreements with the Five Star Movement. But this is not the end of Italy's political crisis, because it's now up to Mattarella and the political parties in Parliament to decide what happens next.

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; in addition, it's also suffering from low economic growth and a relatively high deficit. As a result, Italy's political crises frequently raise concerns among financial markets and EU institutions about Rome's future ability to pay back its debt.

Mattarella is holding consultations with the leaders of the parties on Aug. 21 and 22 to determine if there is support for a new government that would avoid an early general election. Based on those discussions, one of three outcomes likely awaits Italy: a new government, an early general election or, less likely, a resurrection of the agreement between the Five Star Movement and the League.

A New Government 

Italians won't go to the polls if Parliament decides to support a new government. The Five Star Movement is already in negotiations with the center-left Democratic Party to appoint a new government. Ultimately, these parties share a common interest: avoiding an early election, given that both are polling poorly and stand little to gain from snap polls.

Some obstacles remain to a deal, however. To begin with, the Democratic Party is internally divided, as some members support an agreement with the Five Star Movement while others are more skeptical. On Aug. 21, the party took a step toward a power-sharing deal by noting that it would partner with the Five Star Movement only if the parties form a stable government that supports EU institutions, accords the Italian Parliament a central role in policymaking, changes direction on immigration policy and supports policies to promote greater social and economic equality. If the center-left party remains united and reaches a deal with the Five Star Movement, the two allies would not need support from other parties to form a government. Still, the coalition could be fragile, constantly facing the threat of collapse because of divisions within the Democratic Party.

If only some of the Democratic Party's members reach a deal with the Five Star Movement, the coalition would need support from others (including former Prime Minister Silvio Berlusconi's center-right Forza Italia) to reach a majority in Parliament. This would produce a combustible government in which each member of the coalition could threaten to summarily withdraw from the government if its desired policies are not implemented.

The Five Star Movement and the Democratic Party share a common interest: avoiding an early election, given that both are polling poorly and stand little to gain from snap polls.

At the same time, parties that want to avoid an early election might not necessarily assume Cabinet positions as part of an agreement. For example, the Democratic Party and Forza Italia could offer parliamentary support to a minority government led by the Five Star Movement, or they could all support a technocratic government in charge of approving a package of specific policies (such as drafting a budget for 2020).

A new government without the Euroskeptic League would probably seek better relations with the European Union, which would please both Brussels and financial markets. Even so, a coalition between anti-establishment and center-left forces is likely to support policies aimed at increasing public spending and expanding welfare benefits, which could raise concerns in Brussels and financial markets about a higher fiscal deficit in Italy. Indeed, this is no minor issue in a country where debt exceeds 130 percent of gross domestic product and growth is negligible. The new allies would also have to reach a deal on the duration of the government, as they would have to decide between trying to see out the current parliamentary term (thereby remaining in power until the next general election in 2023) or establishing a specific list of policy goals (such as approving the 2020 budget) and then holding a general election.

A General Election 

If the parties fail to reach a deal to appoint a new government, Mattarella would have to dissolve Parliament and schedule a general election within 45 to 70 days — making late October the earliest possible date for a vote. Such a timeline, however, presents a host of problems for Italy. First, Rome is supposed to present a 2020 draft budget to the European Commission by Oct. 15. If Italy has only a caretaker government by that date, the country may need to ask Brussels for more time or, conversely, risk presenting a budget that the next government may reject.

A general election would also lead to months of political uncertainty in Italy. If the vote is scheduled for October or November, Italian politicians would spend the time until then in campaign mode, while a caretaker government would have little to no room to implement structural reforms to boost economic growth. After the vote, it may be weeks before the parties in the new Parliament cobble together a government, meaning Italy may not have a fully functioning government until early 2020.

For all his Euroskepticism, the League's Salvini is unlikely to campaign on the promise of an "Italexit," as he is more likely to promise to reform the bloc from within than to leave it outright.

According to opinion polls, the League stands a strong chance of scoring the highest in the general election. After that, the party would likely reach out to like-minded forces, such as the right-wing Brothers of Italy party, to form a government. A coalition of nationalist and Euroskeptic forces would greatly concern Brussels and financial markets regarding the future of Italy's membership in the eurozone. While Salvini has recently said he does not want Italy to leave the common currency area, the League has flirted with the idea in the past. Earlier this year, some League lawmakers even toyed with the idea of introducing "mini-BoTs" — bonds in small denominations that could be used for payments to the state — that would effectively work as a parallel currency. And for all his Euroskepticism, Salvini is unlikely to campaign on the promise of an "Italexit," as he is more likely to promise to reform the bloc from within than to leave it outright. Still, fears of a potential departure from the European Union (either intentionally or accidentally) would take their toll on Italy's borrowing costs and its banking sector.

A League-Five Star Reconciliation?

This is the least likely of all the scenarios, considering the high animosity and the deep mistrust between the two erstwhile allies. Nevertheless, there is a small chance that the League and the Five Star Movement will find an agreement to appoint a new Cabinet with a new distribution of power to reflect the League's strong popularity. This scenario would avoid a general election, but it would also resurrect an alliance that has shown obvious signs of dysfunctionality. This would likely be a short-term solution to temporarily defuse a crisis without really solving any of the issues that created it in the first place. In the end, regardless of which option Italy's parties choose, the country will face an uphill battle coming up with a stable government that addresses its numerous political and economic woes.

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