The Threat from Italy
For Europe and Italy, hopes had risen that the economic and political turmoil of the past decade was a thing of the past. In Europe, recent years have seen higher levels of economic growth and a degree of stability not seen since before the financial crisis. Even Italy, Europe’s weakest large economy, enjoyed a period growth and relative stability in recent years, raising hopes that the dire predictions of Italy’s economy decline would not come true, and that Italy would not bring down the rest of Europe. Of course, Europe has still had to deal with a number of major threats such as Brexit and the spread of protectionism and nationalism that jeopardize the region’s future well-being. Nevertheless, Europe’s shaken confidence returned in recent years, leading the region to believe that it could overcome these challenges. Now, Italy has a new government, and this government is shaking Europe’s new-found confidence and threatening to unleash a new crisis in the region.
A Populist Government: While many issues are vexing European leaders at the moment, the formation of a new populist government in Italy is one they would rather not have to deal with. This new government is an unlikely alliance of the populist Five Star Movement (who’s support base is in Italy’s poorer south) and the right-wing League (based in wealthier northern Italy). The Five Star Movement was formed less than a decade ago, but this populist movement has emerged as the strongest force in Italian politics in recent years on a platform of direct democracy and opposition to the European Union. Its new partner, the League, is a far-right party that once called for a break-up of Italy and now has championed a severe crackdown on illegal migration in Italy. On one hand, these two parties are similar in their populist and Eurosceptic stances. This is evidenced by their plans to crack down on migration and improve relations with Russia. However, they differ greatly on many economic issues, making their new coalition an unwieldy creation. As such, the new government has pledged to both lower taxes and to offer a basic income for poorer Italians, something that could wreck Italy’s fragile financial position. Altogether, these policies have put Italy’s new government on a collision course with many of its European Union partners who fear that uncertainty in Italy could trigger a new crisis in Europe.
A Fragile Economy: While the new government in Rome is a concern for the rest of Europe, so too is the health of Europe’s fourth-largest economy. Since 2001, the Italian economy has expanded by an average rate of just 0.2% per year, the worst performance of any developed economy in the world over this period. In fact, when the Italian economy managed to record growth of 1.5% last year, this was viewed as a strong performance for that country, a sign of how bad things have been for Italy so far in the 21st century. Even with the recent upswing in growth, Italy’s economy remains very weak. For example, Italy’s domestic market has not grown at all in recent years, as the country’s working-age population has shrunken and wage levels have stagnated. Likewise, Italy’s has little or no presence in many of the world’s fastest-growing high-tech services and industries, forcing the country to compete in highly-saturated and slower-growing sectors of the economy. Italy’s banking sector also remains a source of concern, despite the efforts made by Italy and its European partners to strengthen this sector in recent years. As a result, the outlook for the Italian economy remains poor, with economic growth forecast to average just 0.7% per year over the next decade. Without question, Italy’s economy needs major reforms, but it is unlikely that the new populist government in Rome will move in that direction.
Low Expectations: During the strenuous negotiations that took place on the formation of a new coalition government in Italy, the Five Star Movement and the League were forced to water down some of their more extreme policies. Now that they are in power, they may revisit some of these policies, particularly if Italy’s economy slows and the government’s support falters. Meanwhile, the parties and leaders that dominated Italian politics for decades are likely to remain weakened, given their role in Italy’s economic decline. However, they will hope to make a comeback if the populist coalition falters. As for Italy as a whole, it is hard to envision how the relative decline of the country’s economy can be arrested, as growth prospects in Italy are weaker than in any other large economy in the world. Worse, unlike Greece, Italy’s economy is still large enough to cause major damage across Europe and to bring down other weaker European economies with it. As such, while European leaders fret about Italy’s new government, they also have to hope that it can defy expectations and lead an Italian revival, lest Europe find itself in another economic crisis.