Observers of Italian politics always argued that Mario Draghi’s ‘mission impossible’ was bound to fail. While on paper, the outgoing prime minister had the support of all political parties except for Fratelli d’ Italia, the self-centred interests of the many parties in the Italian political system meant that Draghi’s administration would not last more than a few months. So what is in store for Italy and the EU when a new administration takes over after elections in September?
If opinion polls are correct, the next Italian government will be a coalition of the right-wing populist La Lega, the conservative Forza Italia and Fratelli d’Italia, a party with roots in Italy’s post-war neo-fascist movement. Giorgia Meloni, the charismatic leader of Fratelli d’ Italia, is likely to be Italy’s first woman prime minister.
In the short time he was prime minister, Draghi achieved significant success. He provided the country with political stability at a crucial moment, steering it through the pandemic and putting together a €190 million plan to use money from the EU’s pandemic recovery fund. Draghi also strongly supported Ukraine, backing strong sanctions on Moscow and advocating, offering Ukraine the status for membership of the EU. It is doubtful that the eurosceptic supporters of La Lega and Fratelli d’ Italia will support the foreign policy model created by Draghi.
The populist right-wing coalition will likely propose tax cuts and increased social benefits during the current election campaign. Still, when the elections are over and the fundamental task of governing a country with chronic economic problems becomes urgent, the room for manoeuvre for the new administration will be minimal.
Financial markets and investors across Europe are looking nervously at Italy. The European Central Bank is also getting tougher on how it deals with the debt of member states that show little political will to deal with the structural weaknesses behind their underperforming economies.
Despite introducing a new bond-buying scheme in the form of the Transmission Protection Instrument (TPI), the ECB risks losing its credibility if it fails to enforce strict reform conditions on member states whose debt comes under pressure in financial markets.
In the dissolution of parliament address, Italian President Sergio Mattarella warned Italian lawmakers: “There are pivotal deadlines (linked to access to EU funds). I hope that, notwithstanding the usual tones of a campaign, everyone will give their constructive contribution.”
If Italian debt comes under pressure in the capital market, the ECB can do very little to avoid another sovereign debt crisis
However harsh the centre-right rhetoric against the Brussels establishment and bureaucracy, they will have to come to terms with realpolitik which at present is that Italy is critically dependent on the European Commission’s approval to fork out €200 billion of EU funds subject to strict conditions that include the adoption of a new completion law, tax reform and an overhaul of judicial procedures to accelerate court trials that are the slowest in Europe.
If the new Italian government fails to deliver on its commitment documented in detail in a 664-page annexe to Rome’s deal with the Commission, it would not just hurt Italy that would not get the promised funds. Luigi Scazzieri, a senior fellow at the Centre for European Reform think tank, argues that “the perceived success or failures of the fund depends on whether it is seen to be successful in Italy, or whether it is seen to be wasteful”.
The agreement reached by the European Council to set up a fund for the recovery and renewal of the member states’ economies was indeed remarkable as it
established the principle of joint borrowing by the EU. Still, the north-south divide on fiscal rectitude will persist. Northern European capitals remain deeply suspicious of joint debt issuance. If Italian debt comes under pressure in the capital market, the ECB can do very little to avoid another sovereign debt crisis.
For too long, the ECB has been the only game in town to avoid a deep financial crisis when markets lose confidence in the ability of any particular country’s politicians to manage their finance prudently. But the ECB’s credibility and ability to avert another financial crisis are already in doubt.
Italians pride themselves as being masters of l’arte di arrangiarsi – the art of making something out of nothing. It remains to be seen whether a conglomerate of politicians constantly bickering to accumulate more power will be more effective than a level-headed technocrat to work for the common good.
EU citizens living outside Italy will be most interested to see whether the EU can handle another existential crisis to give them some protection from their own country’s political weaknesses.