Italian vote poses next test for EU recovery

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As the EU tries to regain cohesion after the shock of the UK’s Brexit vote and speed up its economic recovery, the looming Italian election arguably represents the biggest political obstacle. On March 4, voters in the eurozone’s third-largest economy will head to the polls amid dwindling support for the ruling pro-EU centre-left Democratic party and rising support for the Eurosceptic opposition.

The likely scenarios after the vote range include a hung parliament, a grand coalition or a populist government with a much more confrontational attitude towards Brussels — including plans to question Italy’s membership of the single currency. None of the outcomes heralds greater stability for a country that, from an economic and financial point of view, remains the weak link in the 28-member bloc.

The biggest flashpoints in the race are expected to be Italy’s lacklustre economy and the migration crisis, which has brought more than 620,000 asylum seekers to the country from across the Mediterranean Sea over the past four years. But analysts say the political wrangling so far has been focused more on the personalities of the party leaders than the huge challenges facing Italy.  “For the moment it’s looking like a very ugly and chaotic campaign,” says Giovanni Orsina, a professor of political science at Luiss university in Rome. “It’s concentrated on personal attacks, provocations and jokes that have nothing to do with real platforms.”

Italy is in better shape than at the national poll five years ago, when it was still deep in recession and financial difficulties. Economic growth this year is expected to be about 1.5 per cent, its best performance since before the eurozone financial crisis, while bond yields — and therefore government borrowing costs — have fallen significantly from the depths of the crisis.  Paolo Gentiloni, who was seen as a stopgap prime minister when he took over a year ago, has quietly gained public approval.

Yet Italy still trails the economic performance of the rest of the eurozone. In particular it remains more vulnerable to financial shocks because of its high levels of debt and the weakness of its banking system, which is burdened with a relatively high share of bad loans compared with other eurozone countries.

Many Italians are still struggling to feel any benefits from the recovery, with the unemployment rate at 11.1 per cent, higher than the EU average, and youth unemployment at 34.7 per cent.  The key political leaders vying for votes are Matteo Renzi, 42, the PD leader who served as prime minister for three years until the sweeping defeat of his constitutional reforms last December; Luigi Di Maio, 31, the Five Star movement’s candidate for prime minister; Silvio Berlusconi, 81, mounting a comeback from sex scandals and a tax fraud conviction; and Matteo Salvini, 44, leader of the Northern League, with a strident message against the euro and immigrants.

Given the expectation of a muddied outcome from the poll, however, analysts and officials in Rome say the next government is more likely to be led by a compromise candidate: perhaps Mr Gentiloni again if the PD performs strongly enough. If the centre-right emerges in a stronger position, some point to Antonio Tajani, the president of the European Parliament, as a potential prime minister. He is a close ally of Mr Berlusconi and Angela Merkel, the German chancellor.

The most disruptive outcome from the Italian election would be a coalition between the anti-euro forces, if Five Star strikes a deal with the Northern League and Brothers of Italy.  All three have questioned Italy’s membership of the single currency, to different degrees, promised to tilt foreign policy more towards Moscow-friendly positions and opposed free trade deals.

Mr Di Maio says that a referendum on leaving the euro would be only a “last resort” if Rome could not change the EU’s economic policies, essentially looser budget rules. But he adds that as things stand today, he would vote to leave the euro. Mr Renzi says that an Italian threat to leave the euro would amount to “folly” but it is unclear whether he can or will mount the kind of unabashedly pro-EU campaign that propelled Emmanuel Macron to victory in the French presidential race.

“The anti-Europeans don’t have the courage to take staunchly anti-euro positions because they know it scares people, but the pro-EU politicians don’t want to take openly pro-euro positions either because they know Italians don’t want to hear them,” Mr Orsina says.

Financial Times