Strife Feature – Italy’s short circuit week and the fight over Europe

by Andrea Varsori

The President of the Italian Republic, Sergio Mattarella (Image Credit: LaPresse)


Italy’s short circuit week

Last week, Italy’s political system went into short circuit. 84 days after the last national elections, an apparently successful attempt at forming a government unexpectedly collapsed at the last minute. Ten days earlier, the two political forces behind the attempt, the right-wing League and the anti-politics Five Star Movement (5SM), had already produced a joint manifesto, a “government contract”. Their members had already approved it: the League had organised voting at hundreds of stands across Italy, while the Movement, coherently with its calls for direct democracy, let its members vote on its online platform, Rousseau. The two forces had already chosen someone for the role of Prime Minister: Giuseppe Conte, a little-known lawyer and professor. They had already agreed on the future ministers. In short, everything seemed ready to go.

Italy’s political system, however, proved to be an obstacle for their plans. In Italy, the President of the Republic nominates the ministers, while the Prime Minister proposes the names. In the days before the collapse of government formation, the President, Sergio Mattarella, had signalled informally that he would not approve the prospective choice for the Minister of Economy. The League wanted Paolo Savona for that role; however, Savona, an economist and former minister, is a hardline Eurosceptic, known for his statements on the euro as a “cage” for the Italian economy and as an instrument of German economic domination. On few occasions, he had stated that Merkel’s Germany amounted to a new version of Hitler’s Third Reich. Most importantly, on May 26, the Italian Huffington Post showed that, in 2015, Savona had presented a Powerpoint presentation proposing a secret plan to leave the euro. On May 27, Mattarella formally declared that he would not accept Savona as Minister, due to the risks he posed to the savings of Italian citizens.

This decision set off what was to be defined as Italy’s deepest constitutional crisis. The League, in fact, reacted by stating that they would never accept to form a government without Savona as the Economy Minister. Matteo Salvini, leader of the League, claimed that Savona was rejected because “he would have defended the interests of Italians, not Germans”. Luigi Di Maio, political leader of the 5SM, went even further, declaring that the Movement would propose Mattarella’s impeachment. If enacted, this would have constituted an unprecedented move in Italian politics. Due to the role of the President as the symbol of the Italian state, rather than a political actor, impeachment was considered seriously only twice in the past, and on both the occasions the Presidents resigned before the process could even start. On May 28, however, Di Maio, in a Facebook video, confirmed the intention to proceed with impeachment and called for a general mobilisation to respond to the President’s decision. On May 29 the Democratic Party, Italy’s main left-of-centre party, organised counter-demonstrations to support Mattarella. In the meantime, most parties were agreeing on holding elections as soon as late July.


What ended the short circuit?

Considering that this was happening as early as the morning of Tuesday 29, it seems incredible that, on Friday afternoon, the same Giuseppe Conte was swearing the oath as Prime Minister, with Savona on his government team. In little more than two days, Italy went from a high-level political crisis to successful government formation; from early elections to political stability (of sorts); from the delegitimisation of the head of State to smiles and toasts with him. What had happened in the meantime? The answer is a mix of economic and political events.

Earlier, on May 27, just after having vetoed Savona, Mattarella tried to form a “neutral”, caretaker government, led by former IMF Departmental Director Carlo Cottarelli. Mattarella had already announced a similar initiative on May 7, when negotiations for a political government had seemed to stall. The prospective Cottarelli government seemed to follow in those steps; besides, the institutional and technocratic character of its components was expected to reassure the markets. This, however, did not happen. In the following two days (May 28-29), the difference in yield between Italian and German government bonds skyrocketed from 191 points to 306 points, pointing out to investors considering Italian sovereign debt as a riskier asset. Stock markets in Europe, Asia, and North America fell, with Italian banks the most hit. This backlash seemed to defy the purpose of the Cottarelli government. The latter also seemed condemned to fail from the start, as only a handful of MPs were ready to vote in its favour.

On the other hand, Di Maio soon understood that he had gone too far, as even the League was refusing to support the impeachment process. He let go of that on the evening of Tuesday 29 and started to pressure Salvini into modifying the government team, moving the controversial Savona to another portfolio. On his part, Salvini was looking forward to new elections, as fresh polls said that his party was due to achieve strong gains; however, a new election would have posed financial problems for the League. Moreover, while Salvini could market himself as the defender of Italian democracy, his continued refusal to form a government without Savona as Economy Minister risked to attract the blame on him. Besides, the opportunity of being part of the government and becoming the Home Minister seemed an acceptable outcome.

Consequently, at the end of a frantic week, Italy received a political government. Notwithstanding the fact that the Five Star Movement is not pro-business at all, and that the League still has a decidedly Eurosceptic tone, investors seem to have valued this development positively. Starting from May 30, global stock markets, including Italian bank shares, recovered. On June 1, the same day as Conte was sworn in as PM, the difference between German and Italian government bonds continued to fall, although to this day it continues to be higher than in April. There seems to be relative harmony between the Five Star Movement and the League, as well as between political parties and the President, notwithstanding the calls for his impeachment  a few days  earlier and the demonstrations against the President’s decision that were due to take place on June 2. Instead, on that day, also observed as Italy’s Republic Day, Conte was sitting next to Mattarella at the celebrations taking place in Rome.


The three main takeaways

If this were the end of Italy’s short circuit week, all these events would be relatively uninteresting; just another episode in the national political drama. Instead, they are tremendously important, not only for the country, but also for the whole continent. There are, in fact, three main conclusions to be taken from all this.

The first takeaway is that, after this week, the Italian political system cannot be really seen as stable, regardless of the existence of a government. This judgment is not based on prejudice: rather, it flows from the behaviour of the governing parties and their leaders. Italy, in fact, could have at least partly avoided the turmoil in the markets. There is a distinct possibility that Matteo Salvini engineered the collapse of the negotiations because the veto on Savona was a great opportunity to go to early elections and gain a larger share of votes. That would amount to an irresponsible act of political opportunism that exposed the instability of the country. Even if that was not true, however, the knee-jerk reaction of the 5SM, Italy’s largest political force, is an even more serious event. Instead of keeping in touch with the President, Luigi Di Maio opted to propose impeachment, without even knowing if the League would have followed him. He was then forced to withdraw that idea. This mix of opportunism, radical tones, and lack of coordination is, potentially, the sign of further instability to come. It may happen again.

The second insight is that Italy is still economically weak and exposed to the opinion of investors. The relatively good economic situation of the country must not mask Italy’s long-standing issues. Italy’s growth is still smaller than most other countries in the Eurozone, and it is expected to slow down next year. The country also has a historically low productivity and a mediocre environment for doing business, beyond being relatively unattractive to foreign investments, lagging behind the UK, Germany, and France, despite recent improvements. Taxes are among the highest in Europe; poverty is increasing; unemployment rate is still high, especially for people between 25 and 34; and the country’s extant growth is dependent on exports, which may be hard hit by the potential U.S.-EU trade wars.

Most importantly, Italy has the 2nd largest sovereign debt in Europe as a percentage of GDP and 5th largest in the world. A 32% share of this debt is owned by external investors. This is important, as any concern regarding the country’s ability or will to repay its debts translates quickly into a higher cost of obtaining funds on the markets, which in turn restricts greatly the government’s ability to spend money for its policies. Foreign ownership of the Italian sovereign debt has been steadily declining in the past years: the share of foreign investors-held debt was 36.1% in 2016, and around 51% in 2010; the ECB’s quantitative easing has been an opportunity for these investors to shed a reported €78 billion of Italian bonds between 2015 and early 2018. On the one hand, decline in foreign ownership is a positive development, as it lowers the risk of contagion between Italy and the EU and makes Italy less dependent on foreign markets. This also means, however, that domestic banks now hold a comparatively larger share of debt. Every sovereign debt crisis, then, translates quickly into a bank crisis, restricting access to credit for firms and families. All these economic fundamentals are unlikely to change anytime soon.

The third insight is that there is still a battle being waged over the common currency and the future of the European Union. It is, first of all, a battle of rules. The new Italian government, although relatively divided on several topics, shares a common goal: relaxing European rules regarding the reduction of debt and restrictions on deficit spending. Cottarelli, a few days before being nominated PM designate, published with his Observatory on Public Budget, a study outlining that the prospective costs of the 5SM-League government amounted to at least €108.7 ($126.8 or £95) billion, with prospective revenues for only €0.5 billion. Although it is likely that the government will enact only some of these policies, it is clear that the 5SM-League executive will try to negotiate, even forcefully, more freedom for Italian economic policy. However, there seems to be scarce appetite for that in Brussels. Although Spain and Greece may join Italy in this battle, Northern countries, and in particular the Netherlands and Finland, will oppose all such moves. The German government will also ward off such requests. Surrendering to Italy’s demands would attract fierce criticism from the right-wing, Eurosceptic party Alternative for Germany, the main rival to Chancellor Angela Merkel’s CDU/CSU. As for France, President Emmanuel Macron’s reform drive seems to have stalled months ago. His ideas have found formidable obstacles in the countries cited above and have been considerably downsized by Merkel just on last Sunday. The Italian government can scarcely change that, even if it abandoned Savona’s brinkmanship, with his project of obtaining concessions in Brussels by threatening to leave the euro.

This is, however, a battle of feelings as well. In the first half of the past week, the tension between Italy and the European Union skyrocketed. In Italy, politicians, pundits, and citizens instantly and vehemently condemned statements coming from Brussels. In a famous episode, on Tuesday 29, Deutsche Welle journalist Bernd Riegert attributed the sentence ‘the markets will teach the Italians to vote for the right thing’ to EU Budget Commissioner Günther Oettinger. This then was confirmed to be a very simplistic synthesis of Oettinger’s words, written by Riegert himself. The following day, an MEP for the German CSU party was quoted in an interview saying that, in case of Italian bankruptcy, ‘it would be necessary to invade Rome and take over the Ministry of Finance’. On the other hand, in Italy, older German stereotypes started surfacing again. In a video explaining Italy’s relationship with the EU and the ECB, Milena Gabanelli, one of the country’s most famous journalists, used a Nazi military hat to represent Germany (while the French were portrayed with a less controversial, but still stereotypical, Napoleonic hat). In general, Matteo Salvini quickly seized the comments reported above to convince Italians that Germany and the EU had pressured Mattarella into vetoing Savona’s nomination as Minister. This happens in a country where only 44% of the citizens think that they benefited from EU membership, one of the lowest results in Europe. In another recent poll, the relative majority of Italians (46%) believes that the country would have a better future outside the Union: only the UK showed a higher percentage. In the next months, then, the relation between the EU and Italy risks to become the terrain for a battle between opposed national rivalries and prejudices.


Italy’s new government: a wedge into a divided Europe

This outbreak of contrast between Italy and the EU is the most important part of this week of instability and constant turnarounds. National rivalries within the European Union are all but gone. In the case of Italy, they have been waking up for quite some time: at least since the birth of the technocratic government of Mario Monti, in November 2011, when Italians started believing that the EU membership entailed more interferences and restrictions than benefits. This is an idea that the League is enthusiastically embracing. It may become stronger as the two governing parties try to enact the government contract. They will seek to cover its expenses with more public debt, thus clashing with European rules. In this contrast, both governing parties will find politically convenient to accuse Germany of imposing its will on Italy. National rivalries will then take centre stage, shaking the ideational foundations of Italy’s EU membership to their core.


The article is now available in Italian! Link 


Andrea is a PhD candidate at the Department of War Studies, King’s College London, as well as the Editor-in-Chief of Strife. His research focuses on the strategy of urban armed groups in the Global South, in particular on their decision-making processes and their methods of territorial control. Andrea holds an MA in International and Diplomatic Sciences from the University of Bologna; he is also an alumnus of the Institute of Advanced Studies at the same university. His main interests include criminal organisations, drug trafficking networks, urban riots, and urban insurgencies. You can follow him on Twitter @Andrea_Varsori.

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