EKIP– Expert Club for Economics and Politics A Different Opinion
Author: Konstantin Arestov
Italy, one of the world's most indebted countries, faces a serious political test after parliamentary elections on March 4, which will pit anti-establishment parties against traditional pro-European parties. The next parliament is likely to be highly fragmented, making it difficult to form a new government.
Meanwhile, the situation is such that the country needs bold reforms to cope with the inevitable future interest rate hikes by the ECB, but the populism of parties like the Five Star Movement and the Northern League makes the political environment quite difficult for reforms. We certainly cannot expect miracles from the future government in Italy, which further postpones the solution to the Italian problem of high public debt, which is actually a problem of the entire eurozone.
The political and economic context of the upcoming elections
The elections will be the first in 5 years after the previous parliament managed to survive against all odds and elect 3 governments that managed to maintain Italy’s pro-European orientation and push through some unhelpful reforms. It is important to note that the parties in Italy do not want to create uncertainty for the markets, which would lead to increases in interest rates on debt, but there is also a huge mass of people dissatisfied with the current economic and political model, which is the electorate of the parties outside the status quo. Parties on both the left and right of the political spectrum supported the last 4 governments of Italy in order to preserve political stability. Something similar is expected to happen after the next elections.
The main left-wing party, Matteo Renzi's Democratic Party, and the main right-wing party, Silvio Berlusconi's Forza Italia, are most likely to form a grand coalition similar to the one in Germany, but including several smaller parties, which will inevitably make the next government more unstable. This will leave the populist parties in opposition, which is what the markets are really looking for. There is also a second option, in which the Democratic Party and Forza Italia cannot form a majority and new elections will be held, after which no one can currently predict what will happen. The third and fourth options are, respectively, a center-right government including Forza Italia and the Northern League and an anti-European government including the Northern League and the Five Star Movement, but surveys show that these scenarios are unlikely to come to pass.
The political platforms of all the major parties feature unrealizable promises to increase spending on social programs and reduce the high tax burden, as well as to reduce the huge public debt exceeding 130 percent of GDP. For example, the center-right coalition, led once again by Silvio Berlusconi, proposes to introduce a flat tax of 23 percent, but this is expected to lead to a budget gap of at least 50 billion euros. On the other hand, the Five Star Movement has proposed to introduce a program for a minimum citizen income of 780 euros per month, which would be provided to about 9 million people with incomes below 9,360 euros per year. The cost of this measure is expected to be 17 billion euros, but indirect costs such as people's reduced interest in working could inflate the price further. The Democratic Party, on the other hand, has a rather expensive program aimed at supporting the birth rate by providing tax breaks of 240 Euros per month for each child up to 18 years old in the family.
The refugee crisis and the future of the Eurozone are the main election issues
The issue of immigration is also playing a big role in these elections, with the far-right Northern League proposing to re-establish control over Italy's borders and expel illegal immigrants. The large influx of migrants from Africa also led to some racist statements during the election campaign, after the Northern League's candidate for governor of Lombardy, Italy's largest region, said that "the white race must defend itself." Meanwhile, a former Northern League candidate for city council carried out an attack on immigrants in the city of Macerata, injuring six people, in response to the brutal murder of an 18-year-old girl by an immigrant. The real culprit for all this is the EU's grossly ineffective immigration policy, which has led to increased social tensions.
The risk of exiting the eurozone remains low after the Five Star Movement removed from its platform the promise to organize a referendum on Italy’s participation in the monetary union. This leaves the only anti-euro party left, the Northern League, but without serious political support in Italy and abroad, it cannot do anything substantial about the issue. The story with Greece also teaches us that apparently anti-euro parties like Syriza have no real intention of exiting the eurozone, as this would lead to economic collapse if not coordinated with other countries.
The center-right coalition, however, has a proposal to introduce a kind of parallel currency that could prepare Italy for a future exit from the eurozone. The proposal for the so-called parallel currency is based on the issuance of around 70-100 billion euros of interest-free debt in small denominations, which could be used to pay taxes and purchase goods and services from the state and state-controlled enterprises. The proposal would ultimately increase the budget deficit because it de facto represents a tax cut, but would not significantly reduce Italy's dependence on the euro.
The reforms needed and why they probably won't happen
So the big question remains - will anything significant happen after the elections? The answer is most likely no, since neither the political parties have the capacity to inflate the deficit and further worsen Italy's budget finances, nor do they have the necessary political capital to make reforms and improve them. Italy remains in the waiting room for the end of the era of cheap money, which will create the necessary criticality for governments to start making reforms again. And it definitely needs them.
The biggest economic problem in Italy is the excessive centralization of collective labor agreements, which de facto condemns workers in southern Italy to remain uncompetitive, since wages throughout the country are set centrally. The country also needs to fight corruption and reduce state spending, improve the efficiency of the judicial system and create conditions for improving education. The high youth unemployment rate, which stands at over 30%, remains a major problem, which, if not addressed, could create even greater problems in the future.
Ultimately, the question is not whether Italy will have a government after these elections, but whether it will solve the long-term challenges facing the country. Given the expected fragmentation of the next parliament, the lack of real reform proposals and the absence of pressure from the markets, this is unlikely to happen. This means that the eurozone continues to be faced with the question of how Italy will cope with its high public debt, which it would realistically not be able to service without the support of the ECB.
For Bulgaria, this should be a red light that the situation with the over-indebted countries in the eurozone has not been resolved and the advantage of remaining in a waiting mode regarding entry into the monetary union outweighs the benefits that we would derive from membership. The eurozone is certainly not about to fall apart, but the risk of finding ourselves inside it during a renewed debt crisis remains a serious reason to want to continue running “on the touchline.”
