The EU Face-To-Face With A No-Confidence Motion: How The Mediterranean Determines The Results

After the 2016 U.S. elections, populist governments experienced a rise in popularity. In France, the National Rally came close to clinching presidential office and in Germany, the Alternative for Germany won its first seats in the Bundestag.  Italy most recently joined this trend. On 1 June, a populist coalition of the Five Star Movement (M5S) and the Northern League (two of Italy’s largest parties after the March general election) was sworn in.

The M5S sponsors anti-globalism and anti-establishment views. Its party leader Luigi Di Maio, is the new labour and economic development minister, promising to enact universal basic income in Italy. Its counterpart, the League, is vehemently anti-immigrant, promising to expel 500,00 illegal immigrants from Italy. Party leader and interior minister Matteo Salvini, boasts xenophobic inclinations and frequently posts anti-immigrant memes on social media.

Though President Sergio Mattarella of the opposition Democratic Party (PD) initially welcomed the coalition and appointed its prime minister (PM) Giuseppe Conte, he later overruled the attempt to form a government because of their choice of finance minister, Paolo Savona. Savona is an economist with a reputation of being anti-European, Eurosceptic, and anti-German.

Mattarella’s actions have ignited a political crisis as it begs to question the legitimacy of Italian democracy. Di Maio even calls for Mattarella’s impeachment, claiming such a rejection of the will of the majority is unconstitutional. The coalition was eventually sworn in after changing their choice of finance minister to Giovanna Tria, an economics professor not publicly affiliated with any party. However, the potential consequences of Mattarella’s rejection still loom over Italy. The appeal of anti-establishment views could grow if it the Eurozone is perceived to have greater authority than the will of the people, as Mattarella’s actions indicate that abandoning the single currency is not an option.

Neither parties’ joint or individual platforms indicate anti-European sentiment however, they are pushing for renegotiations of two Eurozone agreements: The Stability and Growth Pact and Fiscal Compact. These agreements obligate states to budget discipline and comply by targets set by Brussels. The coalition’s platform calls for EUR100 billion in tax cuts and spending pledges. Specific policy proposals include a basic income of EUR780 which would amount to EUR15 billion per year, and an income tax rate of 15%-20% that would result in raising public debt to over 150% in five years. Such a platform holds hefty economic implications for Italy and the EU, as it would be a breach of the rules that govern the Eurozone. The platform suggests an unusual and perhaps, unattainable task where the M5S and League are attempting to push Italy towards social welfare by boosting pensions and benefits for the poor, while implementing tax cuts and maintaining a flat tax rate.

To accomplish such a feat, the government would need to run bigger deficits. Italy already has the third highest level of debt in the world (after Japan and Greece) at over EUR2 trillion. This amounts to over 130% of the country’s GDP, showing why abandoning the regulations set for the Eurozone would lead to a national debt crisis, alarming Italian and foreign investors.

Therefore, it is understandable that Germany is worried these policy proposals leaves them to bail out Italy, or forces the European Central Bank (ECB) to buy their debt. This is troublesome for Italy as it proves they are heavily reliant on the ECB to keep their banks afloat and their borrowing costs low. If it did anything to upset Europe (i.e. promoting and acting on Savona’s beliefs) the ECB could crash its financial system and economy.

On the other hand, if this is an expected outcome, Italy would have nothing to lose in leaving the Eurozone. This sets a dangerous precedent that could lead to a spread of anti-EU sentiment. Unlike Greece, Italy’s loyalty to the euro is sought after by Europe as Italy’s economy is big enough to throw the entire European economy into disarray if it suffers a debt crisis. To put things in perspective, Italy’s economy accounts for 15% of the Eurozone GDP and 23% of the region’s government debt. Greece’s accounts for 1.8% and 3.3%, respectively. Italy’s exit from the EU is also unlike Brexit, since the UK, unlike Italy, is not a part of the Schengen area or the Eurozone.

The economic impact of this change in government is already seen in Europe, as the Milan stock index was down 2.5% after Conte’s appointment. Additionally, after Mattarella blocked Savona, the sell-off in Italian bonds saw the yield on two-year debt breach 2%. Movements in bond prices are substantial measurements since it affects the cost of borrowing for a government. This bond sell-off affected the share prices of European banks, and the falling bank shares dragged down Europe’s main share markets (i.e. UK’s FTSE 100 by 1.3%, Germany’s Dax by 1.5%, and France’s Cac by 1.3%). Fund manager Giuseppe Sersale, says this represents “a total lack of confidence in the outlook for Italian public finances.”

Although Di Maio assures that there are no plans to exit the Eurozone, Salvini has stated that, “Italy is not a colony, we are not slaves of the Germans, the French, the [bond] spread or finance.” There is also speculation of Salvini purposefully sabotaging his coalition’s bid for government by choosing Savona, so that new elections would be held and Salvini could pass a referendum to free Italy.

Italy’s affairs are far from the only factor threatening European unity. On 2 June, Pedro Sánchez of the Spanish Socialist Workers’ Party (PSOE) was sworn in as PM. This comes a day after he ousted former Spanish PM, Mariano Rajoy of the People’s Party (PP), in a no-confidence vote after a court convicted Rajoy’s former aides of running slush funds to finance PP election campaigns.

Though a socialist, pro-European PM seemingly contrasts Italy’s populism and brewing Euroscepticism, it should not be overlooked that this change in government will have political and economic implications. The PSOE occupies only 84 out of 350 seats in parliament, so Sánchez will have to be reliant on the support of other parties throughout his term. A minority government in a country with deep internal division, coupled with the fact that Rajoy is the only leader in Spain’s modern democracy to lose a no-confidence vote, has already made impact as panicked markets raised bond yields, like in Italy.

Spain will also likely continue to face a constitutional crisis because of the unresolved Catalan independence movement, which saw its peak towards the end of last year when Madrid suspended the region’s autonomy. Catalan nationalists have regained control of the region, promising to continue pushing for independence. Sánchez has shown more open-mindedness than Rajoy so far with regards to discussions about the northeastern region’s future. He must learn to balance Spanish support, without snubbing Catalonia.

Presently, Italians are generally divided over Mattarella and the populists, but a majority of Italians remain pro-European. Italy is a country plagued with instability as it has had 64 governments since WWII and it suffered its longest period of political uncertainty which only ended during the March general election. Having said this, it is in Italy’s best interest to remain in the Eurozone, as they need the continued support from Europe and converting back to the lira would be damaging to the private savings of Italian citizens. The country needs a pro-European movement, as was seen in France. The best option for this is for the PD to consolidate to form a strong and valid opposition to the populist coalition, which could finally bring Italian politics to a long-awaited stable equilibrium.

Sofia Lopez