Carlo Clericetti – Italy’s Double Distress

From the outside, Italy’s political picture appears fragmented and quarrelsome, but the current majority has no intention of bringing down the government and thus handing the country over to the right. The economy has suffered a terrible blow from the pandemic, but the first signs after the end of the lockdown are better than expected. There are two challenges facing Italy: internally developing and implementing a sound plan for the economy; and if the EU and Eurozone reimpose budgetary restrictions, will prevent an economic recovery.

Carlo Clericetti is an Italian journalist. In the past he has directed “Affari & Finanza”, a weekly supplement published by “La Repubblica”, and web portals. Currently he  blogs for “La Repubblica”, for his personal website “Blogging in the wind”, and writes for other websites on economy and politics.

Translated and edited by BRAVE NEW EUROPE

The conclusion of the European negotiations on the Recovery Fund strengthened the position of the Italian government, and in particular of Prime Minister Giuseppe Conte, who was also praised by the opposition, with the exception of Matteo Salvini’s Lega.

Conte, designated by the 5 Star Movement, but not a member of any party, is the most popular head of the Italian government in the past thirty years according to polls. In part it is an effect of the pandemic, which almost everywhere has resulted in citizens to embracing the government in office. But it is also thanks to the image that Conte has been able to build, as a mediator between the quarrelsome political forces that support the government, but also able to impose himself when it comes to reaching a solution.

Conte is favoured by the fact that the political parties that support him are “condemned” not to let him fall. A majority born among parties that until the day before were ferociously insulting each other by hurling terrible accusations, but who found themselves faced with the abyss of early elections that would hand the government over to the right dominated by Salvini’s party, which at that time the polls showed far in the lead with over 34% of potential votes. This pushed them to reach an agreement which – despite the continuous clashes over almost all the decisions to be taken – is destined to last at least until a very important deadline: the election of the new president of the Republic in the spring of 2022. If the Conte government were put in crisis, it would be almost impossible to avoid new elections, which would substantially change the composition of Italy’s Parliament. Compared to the European elections in 2019, the League lost a number of voters, but almost all of them went to the other party of the right, Fratelli d’Italia. While the 5 Star Movement in the European elections lost half of its popular support compared to the previous political elections, it later lost even more ground (now at 16%), but the Democratic Party (PD), which are in the government coalition, has gained no advantage from this and remains at around 20% . Then there is an area of the left that polls estimate between 2 and 3.5%, but so confused and quarrelsome that it is even doubtful whether it will be able to form a party to stand for next election.

Forza Italia, Silvio Berlusconi’s party that had dominated the scene for a very long time, is now at around 8%. In all elections at local level it allies itself with the other two right-wing parties, but its positions on political problems at national and European level are very moderate, so much so that its support for the government has been assumed to bepossible for the time being. It is instead Italia Viva, founded by former Prime Minister Matteo Renzi having split from the Democratic Party, but part of the coalition, which with its positions creates the most problems for the government. It will however be very careful not to let the government collapse since it has dropped in the polls, which give it around 2-3%. The picture is completed by four other small parties (Action, +Europe, Greens, Change!) all between 1 and 2%, very Europeanist and with various shades of liberal to neo-liberal.

In short, with the current numbers in Parliament it is possible to elect a pro-Europe and moderately progressive president, while after new elections there would be a strong probability that Sergio Mattarella’s successor would be chosen by the right.

What appears on the outside is a fragmented political framework and a government always in the balance is in reality a government has no alternative and no one among them who wants early elections, and therefore it is destined to last.

It is this government that will face the difficult challenge of restarting the Italian economy, which has suffered a terrible blow with the pandemic. Yet the scenario is not as catastrophic as one might have feared: the first data say that – after the almost total paralysis imposed by the lockdown – there is a rebound and it is perhaps better than we expected. Industrial production in May rose by 42% compared to the previous month, and in June another 4%. Of course, the recovery is still far away: the first two quarters it sank -8.4 and -21.6%, and the gap compared to 2019 is still 22%. But also the very recent data on the redundancy fund (workers put on hold by the company and paid by an ad hoc fund) is encouraging: in June, the hours dropped by 52% compared to the previous month. Estimates on the drop in GDP so far spoke of a -11%, which could have reached 13 (according to the Bank of Italy) in the event of a second wave of Covid. At the moment, however, the contagion appears to be under control and among the most recent estimates those of two authoritative research institutes limit the drop in GDP to a single figure: 9.2% according to Ref and even 7.2 according to Cer.

The government has mobilized considerable resources: together with the most recent measure the total reaches 100 billion, about 5.5% of GDP: however, less than other large countries such as the USA, Japan, Germany, France and the United Kingdom. But even so the deficit is close to 12% and the debt/GDP is expected to be around 158%. Public finance data are the well known critical factor of the country, not so much for objective reasons, but for the perception by the markets and, above all, for the attitude that the EU and Eurozone will have. How long will the Commission and the Council wait before declaring the emergency over and then lifting the suspension of public finance rules? And will these rules be interpreted flexibly afterwards, or will there be a renewed demand for countries, at least those with the highest rate of debt, to act immediately and tighten budgetary policy? In other words: is the belief still prevailing that debt reduction should be pursued by limiting expenditure, despite that the facts have repeatedly disproved this theory?

We know that the disbursement of money from the Recovery Fund is subject to double conditionality. The first is that projects are developed in line with European strategies and that these projects are approved; the second is that countries comply with the Commission’s ‘recommendations’, including those on public finance. If budgetary requirements become restrictive again, the expansionary effect of loans and grants could be completely frustrated.

Of course, the ability of the Italian government to draw up a good recovery plan and, above all, to implement it, which has often not been the case in the past, will be of great significance. But even the best of plans may not be enough if the “external constraint” (“vincolo esterno”) is tightened again on public accounts. The most important European leaders, and first of all Angela Merkel, have undoubtedly overcome some ideological taboos in the face of the emergency. But if they fall back on the old rules, all efforts will have been useless and they will show that they are unable to learn from experience.

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