Courtesy Reuters Italy's Prime Minister Matteo Renzi talks during a confidence vote in Rome on February 24, 2014

This Time Is Different

Why Matteo Renzi's Italy Won't Be a Basket Case

In the weeks prior to last month’s elections for European Parliament, Italy’s chattering class was looking forward to a neck-and-neck race. The polls seemed to suggest that Democratic Party candidates loyal to Prime Minister Matteo Renzi would struggle to defeat candidates loyal to Beppe Grillo, a former television comedian and founder of an anti-EU protest movement called Five Stars. The anticipated tie didn’t inspire confidence. Italians, commentators argued, were destined to become ever more skeptical of the EU, and the prospects for political reform would be severely diminished. In the influential weekly magazine L’Espresso, Piero Ignazi, a professor of political science at the University of Bologna, wrote that “Grillo’s approval will keep rising” until the Italian government submitted to his demands. 

The elections proved the pundits dead wrong. Renzi’s party scored an impressive 40.8 percent of votes, a feat that was last achieved in 1958 and that initiated 50 years of rule by the Christian Democratic Party. Grillo, by contrast, scored only 21 percent, five percent less than in the last national election. Renzi’s other competitors fared little better. Former Prime Minister Mario Monti’s party failed to qualify for the parliament; former Prime Minister Silvio Berlusconi’s Forza Italia party earned only 16 percent. 

After the elections, Renzi was no longer just Italy’s prime minister -- he was a beacon of a brighter future. Renzi, a 39-year-old ex–Boy Scout from Florence, won the allegiance of the Italian electorate by promising to reform Italy’s sclerotic political and economic systems. He pledged to modernize Italy’s labor market by allowing companies to hire on three-year temporary contracts. He vowed to drastically cut public spending by a total of 10 billion euros ($13.5 billion), and balance the budget by prosecuting tax dodgers defrauding the Italian chest of an estimated 100 billion euros ($135 billion) annually. He also wants to simplify the country’s notoriously complex political system by abolishing the upper house of parliament and passing a new electoral law that would ensure that, in future elections, a single party earns a clear mandate to govern. 

Renzi succeeded, in other words, by promising to carry out the sorts of reform that Italy has repeatedly resisted over the past several decades. In 1994, Berlusconi promised that he, too, would “run the country on a tight budget, like a company” -- but, once in office, he allowed public debt to soar and corruption to run rampant in order to keep special interests happy. Former Prime Minister Romano Prodi tried to promote reforms in 1996 and yet again in 2006, but was stymied both times by his own party’s radical left wing, which insisted on pursuing laws that would mandate a 35-hour work week. When Pier Luigi Bersani, the centrist minister of economic development, proposed a modest privatization program in 2006, special interests mounted fierce protests with the backing of the broader public. In one scene in Rome, crowds applauded as journalists were beaten up by a group of taxi drivers angry about proposals to loosen regulations on their industry.

Renzi is sure to face similar resistance from Italy’s powerful unions, as well as big businesses that have gotten used to fat subsidies from the government. The Italian intelligentsia has mostly offered its rhetorical support for Renzi’s reforms, but the country’s leading journalists and civil servants could easily turn against him if they sense that their own privileges are under threat. Renzi will also have to find ways to outmaneuver numerous political rivals, since he leads a shaky governing coalition cobbled together after former Prime Minister Enrico Letta was deposed earlier this year. And he has to do all this while dealing with difficult economic circumstances. Economic growth has been stagnant for a generation; unemployment stands at 13.6 percent, and is at 46 percent for people of employment age who are under 25 years old. In the first three months of 2014, the economy contracted by 0.1 percent. The government is also staggering under a 134 percent debt-to-GDP ratio, which has dramatically raised Rome’s borrowing costs. 

But the very duration and depth of this malaise is precisely what has enabled Renzi’s rise. Most Italians seem to have finally recognized that there is no longer a way around dramatic economic and political reforms. Renzi’s genius is that he recognized that the broader Italian public desires straight talk, not happy talk. Even if certain segments of the public resist Renzi’s reforms, the broader population should continue to back him as long as Italy’s economy doesn’t worsen.

That is why Renzi’s success will depend on winning over not only the Italian public but also the policymakers in Brussels and Berlin who have been imposing austerity programs on Rome. “The real issue at stake for Italy is the fiscal compact, an intergovernmental treaty to police fiscal discipline,” a report from Eurointelligence, a think tank, recently argued. “It seeks to cut every country’s debt-to-GDP ratio to 60 percent over 20 years. Italy would be starting from a ratio of 135 percent -- an almost impossible task. It would be the embodiment of permanent austerity.”

Renzi will need to convince German Chancellor Angela Merkel -- the greatest proponent of the fiscal compact -- that Italy needs some immediate economic breathing room (enough to allow Renzi, for example, to pass some short-term economic stimulus) if he is to have any chance of passing significant structural economic reforms. Renzi’s best chance of making this argument will begin this summer, when Italy begins a six-month stint leading the European Council. Renzi will have a prominent platform to argue that Italian voters have given him a unique mandate to pursue reform, and that it would be a tragedy to deny him the ability to carry it out.

If Merkel resists Renzi’s appeals, Renzi will have no choice but to publicly lash out against Merkel and her leadership of the EU. Renzi has never been a risk-averse politician, and he would not hesitate to challenge Merkel’s de facto leadership over the EU. In that case, he would likely try to circumvent her by agitating domestically for anti-austerity policies and by trying to build an international coalition that would push for pro-growth economic policies. Together with French President François Hollande, he could force Merkel to the bargaining table.

Renzi has never been accused of lacking ambition. When I recently asked him whether he believes Italy has a promising future, he didn’t hedge his bets. “Our culture and ideas are peerless,” he said, “I am not afraid of saying we will be again Europe’s leaders. Italy will soon be the engine of Europe.” This is the rhetoric that has won over the Italian public. Italians are tired of Italy’s persistent economic malaise. But they are equally tired of populist cynicism. What they want is a realistic path to a better public life, even if it involves going through a period of economic pain. And that is precisely what they believe Renzi is offering them.

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