The Eurozone has entered 2018 in a much more optimistic state compared to 12 months ago. The European recovery is wide-ranging and robust, French President Emmanuel Macron has put forth bold proposals to strengthen EMU governance, Greece is exceeding program targets and preparing to exit its third bailout. Political uncertainty in Germany is a serious problem, but there are no fears of it leading to political upheaval or a relapse into economic crisis.
The concerns of euro observers focus, instead, on Italy. On March 4, Italians go to polls, in a period during which the recovery of the Italian economy seems to be solidifying: Unemployment fell to 11 percent in November, its lowest level in five years, and growth was projected to hit 1.5 percent in 2017 (the fastest since 2010). Yet the upcoming election is not expected to strengthen the tailwinds of the recovery: Between the populists of the Five Star Movement, the xenophobic, anti-European Northern League and the resurgent 81-year Silvio Berlusconi, the post-electoral landscape looks foggy at best. With a public debt at 132 percent of GDP (the second highest in the eurozone), with banks still saddled with legacy burdens from the crisis and with Italians' patience, after two decades of economic stagnation, running thin, an extended period of political instability could entail heavy costs. To work out, as much as possible, the country's nebulous prospects, we contacted Wolfango Piccoli, co-president of the London-based political consulting group Teneo intelligence (and an Italian to boot). What follows is a (very) lightly edited version of our WhatsApp chat.
YANNIS PALAIOLOGOS: Wolfango, good morning. Our topic today is the upcoming Italian election on March 4, and there are many major issues to grapple with. I will begin with perhaps the most crucial of them all – the clarion call by the leader of the Northern League, Matteo Salvini, to reopen Italy's brothels. What's the thinking there, Wolfango? Can prostitution be the key driver that will push Italy's economy forward?
WOLFANGO PICCOLI: This proposal is part of the many lavish pledges made by all political parties to woo voters. A recent poll indicated that 78 percent of the voters believe that none of these pledges will materialize. That's the level of cynicism prevailing.
YP: But surely this would be a revenue-enhancing measure, no?
WP: I guess it could if well managed, but it would not cover for the costs of the many proposals put forward by the various parties, including a flat tax, abolishing university fees, TV fees, minimum pension worth 1000 euro/month and a guaranteed minimum income for citizens. It is utter madness. Nothing said about how to tackle Italy's massive public debt.
YP: Sounds a lot like many of the pre-election campaign "programs" over here… Let's tackle the debt in a minute, but first of all: Silvio – a man Italians seem never to become cynical about. Is this the main political story of this election – his dramatic comeback? How do you account for it, and how far could it go? If he gets his conviction overturned at European level, could he once again become PM?
WP: Berlusconi's comeback and Renzi's downfall are the key two stories of this election. Berlusconi is a political genius and his ability to connect to Italian voters is unparalleled. He managed to rebrand himself as the experienced, successful statesman that can stop the populist wave in Italy. This despite the fact that he is a populist himself. He cannot become PM for legal reasons. The ECJ ruling will come too late for him. However, he will be the kingmaker.
YP: What is that likely to mean about the direction of the next government (assuming one can be formed)? Will it be able to institute necessary reforms? Will be it constructive or -sceptic on the European front? Berlusconi has certainly been dialing back the anti-euro rhetoric of late…
WP: It is likely to be more of the same. A patched up deal, a government inherently unstable and unable to deliver meaningful reforms. Possibly embracing a harder line on migration and pushing stronger for lifting the sanctions against Russia.
YP: But less anti-euro than we thought a right-wing government might be even a few months ago? Where does the Northern League stand on the euro at this point? Are they for getting out or aren't they? And will there be a government, do you think, or are new elections more likely?
YP: The whole line on the euro is fuzzy. They saw what happened to Le Pen and toned down the rhetoric on it. The bottom line is that a referendum on the euro is unlawful. The constitution would have to be changed or a special law passed for such a referendum to happen. In the most likely scenario a government will be formed. The whole process will require careful management by the President. There is also the possibility that Berlusconi and his allies may win a thin majority and thus be able to form a government alone.
YP: What about the new electoral system? Is it accurate to say it badly hurts the prospects of M5S [Five Star Movement]? Was it designed for that purpose?
WP: It was designed to harm the M5S but it seems it may equally affect the PD [Democratic Party]. The PD will only win a handful of seats in the first-past-the-post districts in the North of Italy. It is a system designed for two main purposes: give the power to the party leaders to select the majority of candidates that will get elected, and to make sure that the voters will not decide the governing arrangement. This will be decided in post vote talks between the politicos.
YP: OK, what about the economy? Growth beat forecasts in 2017, exports are up, yet the PD has not reaped the benefits. Why? Also – is it really the case that there are no serious proposals to bring down the country's massive public debt?
WP: Zero credible proposals on debt. The idea is that the matter will be solved by strengthening the economy. Nobody talking about making cuts. On the effects of the recovery – it is hard to feel any benefit after more than 15 years of stagnation. The economy is doing better but its foundations remain weak. Any external shock would have a major impact.
YP: …and there are still major internal shocks possible, e.g. in the banking system.
WP: It cannot be ruled out. Various second tier banks may need help. But they do not pose a systemic risk.
YP: Two more things before I let you go: if Berlusconi is the kingmaker, who is likely to be the next PM? And what's your worst case scenario after the election?
WP: Hard to say who will be the next PM. I doubt it would be Gentiloni or a technocrat. Most likely a figure with no real political clout. The worst case scenario would be a return to the vote after spending a long time trying to form a government. That would write off 2018…
WP: Maybe a 25 percent chance. Sense of self-preservation (of the newly elected MPs) will likely mean Italy gets a government.
YP: OK! So, on that note, I thank you very much for your time, and hope to draw on your expertise further as the vote grows near…