After almost three months of tortuous negotiations and horse-trading, an Italian government finally seems to have been agreed and now just needs parliamentary approval. The reaction of the markets – a fall in the stock exchange and an increase in spreads on government bonds – although mild compared to the crisis of 2011 was a portend of future events.

A “yellow/green” coalition between the Five Star Movement (M5S) and the Lega, the two populist parties which effectively won the general election on March 4th (32% for the M5S and 17% for the Lega) is clearly not the preferred government of big business and the Italian and European establishments. But faced with the electoral collapse of the previously biggest parties, Forza Italia and the Democratic Party, they had little choice. The alternative of no government emerging from an election for the first time in 70 years and another return to the polls threatened to be even more destabilising. Instead, the majority of the ruling class is forced to act through the medium of President Mattarella, hoping in that way to pressurise the government into acting ‘responsibly’.

As Matteo Salvini, leader of the Lega, could not agree to M5S leader Luigi Di Maio being Prime Minister, and vice-versa, the compromise is Giuseppe Conte, an unelected and virtually unknown law lecturer. The 52 page ‘contract for a government of change’ drawn up by the two leaders includes a ‘reconciliation committee’ to arbitrate when disputes arise. It says a lot about the prospects for this cobbled together government which is attempting to reconcile two mainly opposing electoral programmes and satisfy vastly different voters. The M5S swept the impoverished south of Italy where unemployed and precarious workers, in particular, wee enthused to vote for them by their promise to introduce a citizen’s income of 780 euros a month for poorer Italians . The Lega did best in the North, wooing its small business electoral base with proposed tax cuts via a ‘flat tax’. 

Sixty pecent of people currently have a favourable view of the formation of the M5S/ Lega coalition. Expectations have been raised that this government, unlike previous ones, will actually do what it says and improve conditions after over a decade of economic devastation.  Trying to meet those expectations, however, would mean a collision course with the European Union and market instability. Not satisfying the electorate risks the destruction of both parties’ precarious electoral support and social unrest.

Both the citizen’s income and the ‘flat tax’ appear in the contract, in modified versions, along with changes to the 2011 Fornero pension law that cut the value of many pensions and, next year, will increase the retirement age to 67 years. The contract also promises other reforms, such as the introduction of a legal minimum wage and a reversal of cuts to the health system. Exactly how much these reforms would cost and where the money would come from to pay for them is not fully explained. Some estimates put the cost at 100bn, others at 30bn a year over the life-time of a five year government (assuming the coalition actually lasts that long which given the inherent contradictions is doubtful). 

Economic growth?

The government contract talks vaguely of increasing economic growth (without saying how this would be achieved), as well as cutting waste and combating tax evasion, which is no different from promises made (and broken) by every previous government. It is pure fantasy to think that these changes alone would generate the necessary finances. The economy itself is barely growing in the wake of a 25% decline in industrial production caused by the 2007/8 crisis. The public debt to GDP ratio is the second highest in Europe. The flat tax (in reality, a two tier tax) would drastically cut government taxation (with 50% of the benefit going to the rich). So what are the alternatives? Either swingeing cuts to public spending, which is politically dangerous as both parties have pledged to end austerity, or increasing government debt and a breach of the EU’s 3% deficit limit. 

During the election campaign and the government negotiations both parties came under increasing pressure to tone down their anti- Euro, anti-EU rhetoric. President Mattarella warned Salvini and Di Maio that he has the political power to veto legislation which is unconstitutional (the EU ‘Fiscal Compact’ which demands balanced budgets is written into the Italian constitution). An earlier leaked draft of the contract spoke about withdrawal from the euro and called on the EU to cancel 250bn of Italy’s public debt. These were both ditched from the final draft. Now Salvini and Di Maio talk about reforming EU fiscal law and treaties, including the Dublin Agreement, which obliges immigrants to seek asylum in the first country in which they arrive. And when the EU refuses (as it undoubtedly will) what then? Will the EU become a convenient excuse for not implementing the contract or will there be a direct confrontation with Europe? 

Although Salvini, in particular, continues to be extremely vocal in his attacks on EU interference and the right of the government to “put Italian’s first”, the former would seem the more  likely  outcome but the second cannot be completely ruled out, especially if a market engineered crisis should develop as it did in 2011. Learning from the Greek crisis, both the M5S and the Lega have seriously considered or proposed the option of issuing government bonds (called “mini-bots” by the Lega) which could then be used to pay taxes or buy public services. This would effectively be a parallel currency, running alongside the Euro. It would inevitably be seen as a step towards leaving the Euro, provoking a showdown with the EU and further market turmoil. Europe could also become the issue which tears the coalition apart.

Discontent can grow quickly

The contract includes various proposals regarding ethics in parliament and combatting corruption, which if implemented would generally be quite popular given the deep-rooted corruption that permeates the political class and state bodies. It also contains severe attacks on immigrants, including the diversion of funds allocated to helping refugees towards the deportation of up to 500,000 ‘illegal’ immigrants. More nurseries are pledged but only for ‘Italian families’. ‘Law and order’ and creating a harsher environment for refugees plays well with sections of both electorates who feel that in Europe Italy is host to a disproportionate number of immigrants crossing the Mediterranean from Africa and that those immigrants are in competition with Italians for ever decreasing jobs, homes and benefits. 

But the economic issues will be key to the coalition’s prospects. Discontent could develop very quickly. Polls already show a decline in support for the M5S, most likely former ‘left’ voters opposing the coalition with the far-right Lega. The fault lines which have already been evident as the M5S has tried to be all things to all people are likely to deepen with the movement imploding and fragmenting at a certain stage. In a situation of an ossified and lethargic union bureaucracy and the absence of a Left party how social discontent will express itself is not clear at this stage. But populism, especially the ‘neither left nor right’ populism of the M5S,  will be exposed and found wanting. This will pave the way for rebuilding the social and political organisations necessary for really defending the interests of working people.

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