Some analysts fear coalition of M5S and the League could tip Italy into a Greek-style crisis
Jon Henley European affairs correspondent
Italy’s new government, likely to be formally confirmed within the next few days, sets a perilous precedent for Brussels: it marks the first time a founding member of the EU has been led by populist, anti-EU forces.
From the EU’s perspective, the coalition of the anti-establishment Five Star Movement (M5S) and the far-right League looks headstrong and unpredictable, possibly even combustible. Leaked drafts of their government “contract” include provision for a “conciliation committee” to settle expected disagreements.
Mainly it looks alarming. Both parties toned down their fiercest anti-EU rhetoric during the election campaign, dropping previous calls for a referendum on eurozone membership (popular votes on international treaties are, in any case, barred by the Italian constitution). But as they approach power, the historical Euroscepticism of the M5S and the League is resurfacing.
An incendiary early version of their accord called for the renegotiation of EU treaties, the creation of a euro opt-out mechanism, a reduction in Italy’s contribution to the EU budget and the cancellation of €250bn (£219bn) of Italian government debt.
The parties’ leaders, Luigi Di Maio of M5S and Matteo Salvini of the League (who counts the likes of Marine Le Pen and Viktor Orbán as his allies), were quick to say this leak was premature, and a later version of their contract showed the section on Europe had been much watered down.
The euro opt-out had gone, and calls for changes to EU treaties and monetary policy were marked in red, meaning they are yet to be agreed. But the draft still urged a debate on the EU’s stability and growth pact, greater powers for the European parliament, a denunciation of austerity policies and the repatriation of “certain EU competences” to member states.
The general tenor certainly suggests the new government will not back down from its belief that – in the words of one senior League official, Lorenzo Fontana – “people come before economic obligations”. Complaining about “unelected Eurocrats”, M5S’s Di Maio said it was time for Italy to “show courage … and change things”.
The coalition could also fall out with Brussels over its plans for a clampdown on immigration and a call to cancel all economic sanctions on Russia. But of far greater concern in EU capitals are a raft of tax-cutting, welfare-boosting and budget-busting economic and social policies that could spell serious trouble in the eurozone.
Both parties’ election manifestos promised to scrap pension changes made in 2011. They also reportedly plan to introduce a 15-20% flat tax and some form of minimum basic income, both of which may get watered down but are almost certain to be reflected in drastic tax cuts and big increases in welfare spending.
Economists and the Italian media have costed the agreed M5S-League policy programme at between €65bn and €100bn. And the two parties have repeatedly said they feel no need to respect European commitments in implementing their programme.
Fed up with the country’s long, seemingly irreversible economic decline, persistent high unemployment, and a refugee and migrant crisis, Italy’s voters turned on the political centre that has governed (or failed to govern) Italy since the 1980s.
But some analysts fear that if the radical new government they elected does push ahead with its promised policies, the result could be a Greek-style banking and debt crisis in the eurozone’s third-largest economy.
Italy’s debt mountain is €2.3tn, or 132% of GDP, the highest ratio anywhere in Europe apart from Greece. If – and it’s a big if – the coalition starts reversing recent reforms and racking up deficits, markets could rapidly lose faith in Italy’s ability to repay. And if that happens, things could turn quite nasty, quite quickly.
Europe’s, and especially the eurozone’s, biggest fear is that Italy plunges into the kind of economic meltdown that eventually came very close to catapulting Greece – by that stage led, remember, by a radical-left government that was hellbent on overthrowing the eurozone’s rules – out of the single currency in 2015.
The parallel is far from perfect, and neither M5S nor the League seem to be spoiling for the kind of fight that Syriza once sought. But the EU could most certainly do without a Greek-style crisis on an Italian scale.