Time to Start Worrying: Populists May Form Government in Italy

The Euroskeptic Five Star Movement and League have until Sunday to hash out a deal.

Luigi Di Maio, the leader of Italy's Five Star Movement, answers questions from reporters in Rome, April 12
Luigi Di Maio, the leader of Italy’s Five Star Movement, answers questions from reporters in Rome, April 12 (Presidenza della Repubblica)

Italy’s Five Star Movement and (formerly Northern) League may form a government after all.

President Sergio Mattarella has given the two parties until Sunday to hash out a deal.

Time to start worrying.

Obstacles

Since the election in March, which give no single party a majority, the Five Stars and League have been at loggerheads over two issues:

  1. Who should provide the prime minister in a two-party coalition.
  2. The Five Stars’ refusal to govern with former prime minister Silvio Berlusconi and the League’s refusal to govern without him.

Berlusconi himself removed the second obstacle this week, when he said his party, Forza Italia, would neither oppose nor support a coalition between the two larger parties.

Ditching Berlusconi, however, undermines League leader Matteo Salvini’s case for claiming the premiership. Without Forza Italia, his party would very much be the junior partner in a coalition.

If Salvini and Five Star leader Luigi Di Maio are unable to do a deal by the end of the week, Mattarella is expected to appoint a technocratic cabinet and call elections.

Start worrying

Markets have so far been unperturbed by the prospect of a populist government in Rome. They should be.

The Financial Times lists the areas in which the two parties deviate from the European mainstream:

  • Euro: Although neither party calls for an outright euro exit anymore, both are skeptical of the single currency. The Five Stars support a referendum on euro membership.
  • Fiscal policy: Both parties have vowed to defy EU budget rules and raise deficit spending.
  • Pensions: Both argue for overturning 2011 reforms that raised the retirement age and made the pension system more sustainable.
  • Banking rules: The parties would prefer nationalizing, rather than recapitalizing, weak banks.
  • Trade: Neither party supports free trade at a time when the EU has stepped up its defense of open commerce in the age of Donald Trump.
  • Agriculture: Both parties resist cuts to EU agricultural subsidies. France recently joined Northern European countries in supporting an overhaul of the subsidies system.
  • Immigration: A crackdown on immigration is bound to be a central pillar of any agreement between the two parties.
  • Foreign policy: Both parties have questioned the value of Italy’s NATO membership and both are sympathetic to Moscow.