Markets Disrupted as Italy’s Populists Negotiate Cabinet
Italy’s prime minister-designate, Giuseppe Conte, a political novice and obscure law professor accused of padding his resume, put the finishing touches to his cabinet lineup Friday. And initial reaction from financial markets was far from approving.
Italian government bond prices slumped and the country’s ailing banks saw their stock prices hit an 11-month low. Italy’s outgoing economy minister, Pier Carlo Padoan, warned the incoming coalition government of the anti-establishment Five Star Movement (M5S) and far-right League not to underestimate the power of the markets.
“The most worrying aspect of the program, which this government is working on, is its underestimation of the consequences of certain choices,” Padoan told the Il Sole 24 Ore newspaper.
M5S and the League unveiled their government agreement a week ago, after more than 70 days of tortuous talks, following the country’s inconclusive parliamentary elections in March. The polls saw establishment parties trounced.
The coalition partners’ program includes massive tax cuts favoring the rich — a League demand — additional spending on welfare for the poor, and job-seekers and a roll-back of pension reforms that helped Italy weather the multi-year-long eurozone debt crisis which bankrupted Greece.
Investors — domestic and foreign — are expressing alarm about what the next few months may hold for an Italy governed by unlikely political partners. Fears include a public sector spending spree that will put Rome not only on a collision course with the European Union over budget rules. It also will weaken the already perilous state finances of Italy, the third largest economy in Europe and the second most indebted.
Some financial analysts say investors are becoming wary about European equities in general, fearing political and economic unpredictability in Italy could trigger contagion, prompting a new eurozone crisis. European markets were on track Friday to record collectively their first weekly decline since March — and investors last week withdrew the most money in nearly two years from western European funds.
“Investors should take caution as far as European equities go,” Boris Schlossberg, managing director of FX Strategy at BK Asset Management, told CNBC’s cable TV show Trading Nation this week.
EU officials in Brussels and Italy’s half-a-million migrants are as anxious as investors. They are bracing for confrontations with the incoming populist government, whose two halves agree about very little, except when it comes to euro-skepticism and disapproval of migrants. M5S itself is split sharply between liberals and conservatives.
Earlier this week Italian President Sergio Mattarella approved Giuseppe Conte, aged 54, as the coalition’s nominee for prime minister — despite evidence that the academic had padded his resume with stints at New York University, Girton College, Cambridge and France’s prestigious Sorbonne. None of them had any record of his official attendance, although he was granted a visitor’s library card by NYU.
Conte also claimed in his resume to have founded a prominent Italian law practice, but was only an external contributor, according to the firm.
Few here in Rome believe Conte, who was born in the southern region of Puglia, will be anything but a figurehead. The mutually antagonistic party leaders, M5S’ Luigi Di Maio and the League’s Matteo Salvini, weren’t prepared to give way to each other and let the other have the job — hence Conte’s nomination, which still has to be approved by parliament.
The Economist magazine suggested he might end up as the fictional valet Truffaldino, a character in an 18th century Italian comedy entitled “Servant of Two Masters.” Whether he will be able to bridge disagreements between Di Maio and Salvini is unclear — and a testimony to that, say analysts, is the party leaders’ decision to set up a “conciliation committee” to adjudicate disputes.
“Nobody knows what will happen, because this is a government without precedent and the two parties are virtually incompatible,” said Sergio Fabbrini, director of the LUISS School of Government in Rome.
The parties were locked in dispute Friday with no agreement about who should occupy the key position of economy minister. The League has been pushing for 82-year-old economist Paolo Savona, a former industry minister who wants Italy to drop the euro as its currency, which he describes as “a German cage.” Savona opposed Italy signing in 1992 the Maastricht Treaty, a key document that started the process of closer EU political integration.
Even if the League fails in its bid to secure the economic portfolio for Savona, there are plenty of likely policy clashes ahead between the EU and Western Europe’s first all-populist government, despite the fact the League is no longer demanding Italy drop Europe’s single currency and M5S is no longer pushing for a referendum on Italy’s future EU membership.
Both party leaders now talk about reforming the EU from within.
Nonetheless, flashpoints are on the near horizon. Salvini, a hardline migrant opponent, is likely to become interior minister and will oversee the coalition’s agreed to anti-immigration plans, many of which are in violation of EU law. They include truncating asylum procedures, the forcible detention of irregular migrants and the repatriation of half-million migrants, most from sub-Saharan Africa, to their countries of origin.
Next month, EU leaders are due to extend the European bloc’s sanctions on Russia, but Italy’s coalition partners are opposed, viewing Moscow as a partner, rather than foe. Both M5S and the League want the sanctions lifted that were imposed on Russia for its 2014 annexation of Crimea.
Some analysts predict the new government’s slim majority — only seven in the Senate — as well as fiscal realities, will constrain the revolutionary fervor of Italy’s populists. But others envision instability and unpredictability in the weeks and months ahead.
On Friday, the European Commission’s vice-president for the euro, Valdis Dombrovskis, issued a stark warning to Italy: “Our message from the European Commission is very clear: that it is important Italy continues to stick with responsible fiscal and macro-economic policies.”