Italy, along with a number of other so-called “peripheral” members of the European Union, has suffered immensely since the beginning of Europe’s economic crisis in 2007, experiencing seven consecutive quarters of economic contraction. In addition to this, Italy’s economy has grown slowly since the 1970s, with low productivity, rampant corruption, an overvalued currency in the Euro and, over the last decade, a government more focused on the latest chapter of the sage of Silvio Berlusconi than actual issues. This was made worse by Italy’s extremely large national debt; it entered the crisis with a dangerously high debt-to-GDP ratio of 103%, which only increased with a shrinking economy and fiscal deficits.
The Italian government, like many others in Europe afflicted heavily by the continent’s economic crisis, followed the conventional wisdom of the time. Silvio Berlusconi’s right-wing People of Freedom coalition implemented fiscal austerity measures along with market liberalization. This led to substantial public unrest among those most heavily affected by these policies. As well, despite enacting a program supported by European policy elites and aimed at fiscal stabilization, the economy continued to suffer. Italy failed to rebound from their economic contraction, showed signs of “contagion” from Greece’s debt crisis, and continued to run high deficits, despite serious attempts at austerity. This, as well as Berlusconi’s effectively constant litany of scandals, forced him out in November 2011.
Berlusconi was replaced with Mario Monti, an economist supported by the EU, as caretaker prime minister until national elections in 2013. Monti, with a mandate from a temporarily united parliament to implement emergency measures to protect Italian financial stability from dangerously high interest rates on their government debt, created a government full of technocrats. He implemented new austerity measures and reforms in the labour market, as well as cracked down on tax evasion, with limited success. This apparently endless austerity was met with serious backlash from the Italian population. New political figures like Beppe Grillo, a comedian and satirist with a populist, “anti-politics” platform, began to speak out against these measures and the tired political elites who imposed them.
On Monday, Italians went to the polls, and it produced a nightmarish result. Over the course of the campaign, the projected winner was the center-left Democratic Party of Pier Luigi Bersani, a veteran politician. A seemingly indefatigable Berlusconi, running for another term as prime minister, was projected to do poorly while Mario Monti, throwing his hat in as the leader of the new pro-European centrist party, Civic Choice, would succeed. Few took Beppe Grillo’s Five Star Movement, more an unadulterated expression of popular rage than coherent political movement, at all seriously.
Instead, the Democrats received fewer votes than expected, giving them a narrow majority in the lower house of the legislature and a narrow plurality in the upper house. Berlusconi won many fewer seats than previously, although due to his popularity in the country’s north and an alliance with the regionalist Lega Nord, he maintained a close second-place in the regionally elected upper house. Mario Monti’s party, due to both its pro-austerity platform in a country exhausted by cuts and tax hikes, and Monti’s personal lack of political charm, failed to win its expected number of seats. The main beneficiary of the collapse in support for the other parties was the Five Star Movement. Grillo though has promised to refuse to work with any establishment party. Thus, Italy has no clear way forward out of parliamentary gridlock; it could take weeks to sort out a government, any iteration of which would be unstable, and could lead to fresh elections at any point
Markets have already reacted to this news by plunging. Italy, the sixth-largest economy in the world, needs economic leadership at a time when the fate of the Euro is still unpredictable. While stabilized by European Central Bank chief Mario Draghi’s promise to purchase sovereign debt to soothe panic, poor policy choices or unstable government could lead to spiking bond yields on Italian debt once again, and even the risk of contagion. Italy is a far worse risk than even Greece, due to the size of its economy and its ties to the international banking system. If Italy and Italians make a wrong move, the fate of the world economy could get very hairy very quickly.
– Alex Langer
(Featured photo: Ondablv. Creative Commons, Flickr
photo 1 : uEddy. Creative Commons, Flickr)