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Political armagedon in Italy. Will it destabilize the whole EU?

9 May 2018 16:27|Marcin Lipka

"A political scenario that was least probable six months ago has recently been executed in Italy. After two months of deadlock, populist groups have started talking about the Eurosceptic government. It could be a nail in the coffin for the Italian economy, which is already an EU ball and chain," writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

There is still no government in Italy following the elections held on March 4th. President Sergio Mattarella was supposed to proclaim a technical prime minister in order to slowly bring the country out of its political crisis and calm the situation down with early elections. It is possible, however, that the power in Italy will be divided between the right-wing, eurosceptic Northern League and the left-wing populist 5-Star Movement (R5G). This could be disastrous news for Italy’s extremely fragile economy.

Poor economic forecasts

Most of the countries, seeing the macroeconomic IMF forecasts in April, could have been satisfied. However, this rule does not apply to Italy. According to the Fund, the country is to develop at only 1.1% next year and from 2020 the rate of growth will not exceed 0.9%.

Even taking the pension reforms introduced a few years ago into account, the debt-to-GDP ratio is expected to exceed 115% by 2023 and it is interesting to note that as recently as 2010, this ratio was 80% for Germany and 115% for Italy. The IMF is now expecting the German result to fall to 42.4% of GDP, which is more than 70 pp lower for Italy.

The Italian labour market is also in terrible condition. Employment to the population aged 15-64 was the second lowest in the EU at the end of 2017, 58.2%, while according to the latest Eurobarometer, 74% of Italians have a bad opinion of their country's economic situation. This is the second worst result in the eurozone, right after Greece.

Apart from the current disastrous economic situation, Italy has faced yet another problem. Pensioners' income from social benefits is practically equal to that received from work by the rest of the population and amounts to less than 30,000 EUR per household on average, according to Italstat. As stated by the OECD, Italy spends almost 32% of public spending on pensions. This is the highest of the 35 countries analysed by the OECD. This also means that there is a lack of funds for other purposes, such as investment, education or research and development. Unfortunately, this economic downturn could be exacerbated by the populist and Eurosceptic coalition that has been sprouting up in the past few hours.

The worst possible coalition

Italy's irritation with the economic situation is understandable. However, a coalition of populists and Eurosceptics is unlikely to emerge from 20 years of economic stagnation and marginalisation on the international stage. First of all, because the economic plans presented before the elections will deepen the current collapse rather than revive development.

Both the 5-Star Movement and the Northern League are planning to withdraw the pension reforms of 2011, which, among others, increased the minimum age of benefit recipients and reduced the generous rate of future benefits. The left-wing "R5G" also intends to raise the minimum pension to 780 EUR and to introduce a guaranteed income. The latter has currently been tested on a small proportion of the population in rich countries.

Another economic illusion for Italians may be a closer relationship with Russia. Just over a year ago, the Northern League signed an agreement with the United Russia party, and its leader, Matteo Salvini, was photographed in a T-shirt with Vladimir Putin with the Kremlin in the background (the picture was published by the Financial Times, among others). Moreover, the "R5G" is also in favour of lifting economic sanctions against the Russian Federation.

Hours for a decision

According to media reports, the Italian President gave populist groups 24 hours to form a government on Wednesday. However, if no agreement was reached, the outcome of the next elections would still mean a further increase in the political power of the populist parties. Surveys show that both the R5G and the Northern League can count on more votes than in the March poll and are likely to have a total of 55%-60% support.

The situation in Italy has continued to become more and more complicated and the chances of any positive economic developments have been diminishing. However, there is a growing risk that Italy's economic situation will start to deteriorate very quickly, with major market turbulences. With strong Eurosceptic and populist government, this could lead to another economic crisis in the country and even to another imbalance in the foundations of the entire Union.

9 May 2018 16:27|Marcin Lipka

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