The Pandemic Depression
The Global Economy Will Never Be the Same
A week is a long time in politics, particularly when the fate of a country hangs on the ambitions of a single individual in the way that Italy’s fate now hangs on those of Lega leader (and now Interior Minister) Matteo Salvini. The week started with the collapse of a governing coalition between two populist parties, Lega and the Five Star Movement (M5S), and ended with essentially that same government swearing the oath of office. There were many bit players in the drama, but Salvini was the protagonist. The takeaway is simple: this government will last only so long as Salvini has his way.
The drama began on Sunday, May 27, when Salvini pulled the plug on a coalition government between Lega and M5S. Salvini was insulted by the unwillingness of Italy’s president, Sergio Mattarella, to appoint the Euroskeptic economist Paolo Savona as minister of economy and finance. With his strength in the polls rising, Salvini declared himself ready to face new elections. Rather than allow anyone else to take the economics and finance portfolio, Salvini would rather campaign for a larger presence in parliament.
Mattarella had good reasons to reject Savona, which he explained at length to the Italian people. Although a well-known economist with solid experience in politics and government, Savona is not a member of either Lega or M5S. Since the economy and finance minister will have to decide how to balance the government’s resources, he should have his own political power base or else he will lack autonomy. Moreover, Savona has taken positions on Italy’s membership in the euro—he has called the currency a “German cage” and suggested making contingency plans for exiting it—that are likely to scare international investors. Mattarella argued that he had a responsibility not to unnecessarily put the wealth and savings of ordinary Italians at risk—Savona was too much of a gamble. When Mattarella rejected him, Salvini pulled the plug on the whole government.
The Italian government will last only as long as Matteo Salvini has his way.
Later that day, Mattarella named a competent technocrat, Carlo Cottarelli, to head an interim government until new elections could be held. Cottarelli had held important positions at the International Monetary Fund and in two of the last three Italian governments. His specialty lies in shaping political priorities and balancing government accounts. And he promised to bring a team of technocratic all-stars to play crucial supporting roles. This government would have been unlikely to get a majority of the votes in either chamber of the Italian parliament, but it would not have needed that support to play a caretaker role. What Mattarella needed was essentially a safe pair of hands to reassure markets until Italy could hold another vote.
The markets were fairly quiet on Monday as Cottarelli assembled his ministerial team. Meanwhile, both Salvini and the putative leader of M5S, Luigi Di Maio, went on the campaign trail—at one point arguing that Mattarella should be impeached. Monday was a bank holiday in much of Europe, albeit not in Italy. When European markets reopened on Tuesday, however, they showed their concern. The yield spread between Italian and German bonds doubled to over three percentage points; the share price of Italy’s major banks fell by more than five percent. This turmoil was a clear sign that international investors were not reassured by a technocratic government with no majority in parliament. Mattarella realized he needed to look for alternatives. When he met with Cottarelli that evening, they agreed to look for a political solution instead. Cottarelli would continue to build a cabinet, should it be required, but Mattarella would open a dialogue with Lega and M5S.
Di Maio was open to conversation. He faced challenges from members of his own party, a big tent stretching from left to right, who were unhappy to be working with the right-wing Lega. Moreover, M5S was at best stable in the polls while Lega was gaining strength. With Di Maio worried about an internal challenger for the party’s leadership, the prospect of forming a government seemed more attractive. But Salvini was unwilling to talk. He continued to insist that he would have Savona as economy and finance minister or nothing at all. Without Salvini, there was no coalition.
The market pressure eased off on Wednesday as the prospect of a political government increased. That evening, Salvini was finally persuaded. Di Maio suggested they find a new economy and finance minister and that Savona could move to European affairs. They made a few other changes in the composition of the ministerial team as well.
When Salvini finally accepted, they were able to present a new government to Mattarella, which they did on Thursday. Cottarelli returned his mandate and Mattarella accepted the government proposed by Lega and M5S. The crucial change was the appointment of Giovanni Tria as economy and finance minister. Tria is an economics professor with a somewhat lower profile—he has less political experience than Savona and no ministerial experience at all. In other words, he has none of the characteristics that Mattarella said were essential. The only real change is that Tria does not have a record of challenging Italy’s position in the euro. Given that Savona will hold the Europe dossier in the government, that is at best cold comfort.
All that appeared to matter was what was acceptable to Salvini. The week ended on Friday as the new government took its oath of office. Saturday was reserved for celebrating the anniversary of the birth of the Italian Republic.
CAN IT LAST?
For Mattarella, the new cabinet was at best a face-saving gesture. The open question is how it will be viewed in the markets. The answer will depend upon how stable the coalition is, which will in turn depend on Salvini. Polling data suggests his party has moved from strength to strength. When Lega got 17.4 percent of the vote in the elections on March 4, that was a major surprise for the pollsters, few of whom expected him to outperform his partner in the center-right electoral coalition, Silvio Berlusconi. By May 28, the Lega was polling at over 28 percent. Over the same period, the Lega has moved farther to the right, while M5S has moved to the left.
This repositioning of the two main political parties spells trouble for the future. The legislative agendas of Lega and M5S will inevitably compete for the same limited fiscal resources. Lega wants to lower taxes and M5S wants to increase social spending. They can include both ambitions in the same government document, but paying for them is another matter. Leave aside for the moment all the questions about Italy and Europe or Italy and the euro. The real test will be which side of the coalition is stronger and more determined. What the events of last week suggest is that Di Maio’s strength depends upon his staying in government. Salvini is more willing to overturn the table if he does not get what he wants.
The future of Italian politics and policy seems to hang on the ambitions of a single individual. Mattarella could push his institutional role only so far. Di Maio would rather govern with Salvini than lose the chance of governing at all. Markets are more worried about no government than a government whose program does not add up. This calculus may change, and quickly. The markets could turn on the new government, or Di Maio could lose patience or room to maneuver within his own political party. The institutions of the Italian Republic can be pushed only so far. For the moment, Salvini appears uniquely powerful. This moment may not last for long.