Italy has a new government. It is populist and euro-skeptical. A few days ago, markets sold off violently on fears that a new election would produce a still more populist government and that might take Italy out of the Eurozone or even the European Union (EU). At the time, talk of default also emerged. Markets then bounced back. They may crash again on new policy proposals. But Italy and all those who worry about its moves have a strange source of reassurance. The country’s fractured politics ensure that no Italian government will have the strength to do anything very substantive, for good or for ill. It certainly will lack the ability to end Italy’s formal relationship with Europe or even reverse past reform legislation.
These fractured politics show even within the coalition. Though the League and the 5-Star Movement had gained seats in Italy’s March election, they still lacked an absolute majority. They were strange bedfellows, too. To be sure, both ran against Italy’s political establishment and showed a good deal of skepticism about the European Union and the Eurozone, but otherwise they had little in common. The League, right of center, with most of its support in Italy’s industrial north, ran on a more pro-business ticket of tax cuts and economic reform. The 5-Star Movement, left leaning with most of its support in Italy’s impoverished south, ran a more populist campaign. They savaged each other during the run up to the vote. When they first began talks for coalition, their proposals reflected these differences with the League’s cut in taxes to a flat 15 percent rate incongruously joined to the Movement’s guaranteed income for all Italians.
Investors were far from pleased with this direction. The proposals would have added considerably to Italy’s already troubling budget deficits. Had they become law, the county’s budget gap would have widened far beyond the EU limit of 3 percent of gross domestic product (GDP). Italy’s huge outstanding burden of public debt, already more than 30 percent larger than the country’s GDP, would have grown larger still. In response, the credit rating service, Moody’s, threatened to lower the country’s credit rating from Baa2 to nearly junk levels.
Still, not yet sure that the coalition would actually get…