The ideological shifts, economics and geopolitics of the Italian elections

Lorenzo Genito  -  Doctoral researcher, Department of Politics and International Studies, University of Warwick 

With respect to the relationship between the Italy and the EU, the chances of Italy leaving the euro, though still remote, have never been so high. The League and the 5 Star Movement together obtained more than half the seats in the two houses of the Italian Parliament during March’s elections. In the past, both parties have openly advocated for Italy’s exit from the single currency, on the basis that the EU’s fiscal rules are too tight and have impaired the country’s economic recovery. Although both parties backtracked on their previous claims and did not openly campaign to leave the single currency during these elections, the current Parliament and Government are the most Eurosceptic post-war Italy has ever seen. As the chances of Italy leaving the euro are higher than ever, what consequences would such an event have on global financial stability?

Italy has one of the Eurozone’s largest government debts, currently standing at around €2.4tr, or 133 per cent of GDP. For comparison, Greek sovereign debt (which caused great concern during the Eurozone crisis), stands at roughly €0.34tr (at over 170 per cent of GDP). Crucially, putting to one side questions regarding debt sustainability, Italy’s government bonds alone underpin around 10 per cent of the guarantee (collateral) in the Eurozone’s interbank lending market, which is the key market segment where banks access short-term funding. In short, Italian government bonds are of vital importance in the provision of liquidity in the Eurozone’s financial market. Should Italy actually leave the euro, investors would likely begin a massive sell-off of Italian government bonds, due to the lack of guarantee that Italy’s new currency would maintain its value in the future. Thus, aside from driving the cost of Italy’s public debt servicing to the roof (which, however, could in part be offset by devaluing the new currency), Italy’s exit from the euro could severely damage the Eurozone’s liquidity in financial markets. Such developments would likely lead to a sudden halt in credit, which may trigger a financial crisis. Such a financial collapse could hardly be contained by the European Central Bank, however, having exhausted most of its monetary policy tools and without sufficient resources to purchase enough Italian government debt to make any significant difference. Given the interconnections between the Eurozone and other global markets, a new Eurozone crisis could quickly spread to the US and Asia, triggering a full-blown global financial crisis.

Finally, there is a dimension that is not often discussed: the League’s relationship with the Kremlin. In March 2017, United Russia, the largest pro-Putin party in the country, signed a cooperation agreement with the League. The agreement with the League followed similar moves that Russia had with other far-right parties and anti-immigration parties in Europe, including the Freedom Party of Austria, and Alternative for Germany (AfD). Broadly speaking, these initiatives aim at destabilising liberal values and parties in Europe, in order to delegitimise western sanctions against Russia, following the 2014 annexation of Crimea. On a more personal level, League leader Salvini has repeatedly praised Russia’s president Vladimir Putin, who in return provided the League with support through the Italian division of Rossotrudnichestvo, a federal agency under Russia’s Ministry of Foreign Affairs.

Unsurprisingly, during the League/5 Star government talks, the League strongly pushed to create a pro-Russian government agenda. Indeed, in the final coalition document between the League and 5 Star, Russia is recognised as a commercial and strategic partner, and the document calls for EU economic sanctions on Russia to be lifted. This point was reiterated by Prime Minister Conte in Parliament, who also came in favour of President Trump’s call to re-admit Russia to the G7. Whereas Italy has always held deep diplomatic and commercial relationships with Russia, this would be the first time where a government in western Europe is simultaneously strongly Eurosceptic and pro-Russian. Should the relationship between such a pro-Russian Italian government and the EU reach a very low-point, the geopolitical equilibria in the Eurasian region would certainly swing in favour of Russia.