The success of an anti-establishment party in Italy’s local elections on June 19 highlights that the country’s banking problems, sluggish economic growth and combative relationship with the European Union are changing the perception of Italian voters. In Geopolitical Futures’ forecast for 2016, we predicted that Italy, the eurozone’s third largest economy, will face a banking crisis. Signs of this crisis have already emerged, as the country has struggled to effectively rid its banking sector of non-performing loans while complying with EU regulations that limit the ability of governments to aid banks. Some Italians may have voted for anti-establishment politicians in hope of change, but Italy’s challenges — rooted in its economic system and relationship with the EU – are not going away.
The anti-establishment Five Star Movement, which ran a campaign focused on corruption and promises of change and supported a possible referendum on eurozone membership, won mayoral positions in both Rome and Turin. The party’s popularity tripled in Rome compared to the 2013 local elections, garnering the support of 67.15 percent of the city’s voters. In Turin, the Five Star Movement’s victory ended over two decades of center-left administration. The Democratic Party of Prime Minister Matteo Renzi now controls the post of mayor in only one of Italy’s four largest cities — Milan — and even there the party’s candidate won with merely 51.7 percent of the vote.
The success of anti-establishment forces in Italy is tied to the country’s economic malaise. Italy emerged from a three-year recession in 2015, but growth prospects are still dim. On June 6, the Bank of Italy cut its forecasts for Italian growth in 2016 and 2017 to 1.1 percent and 1.2 percent respectively. Moreover, the country’s statistics bureau ISTAT announced in early June that it is expecting a slowdown in near-term economic growth due to weakness in business expectations and manufacturing orders.
As Geopolitical Futures has outlined, a deeper structural reason for Italy’s inability to overcome its economic troubles is the country’s banking sector, which is saddled with non-performing loans. As a result, lending has fallen and the banks’ unwillingness to boost lending has especially impacted small businesses. Also, a study by the European Central Bank has shown that, unlike their peers in Germany and France, Italian households have suffered due to European low interest rate policies, as household interest earnings have fallen twice as much as interest payments.
Italy’s next parliamentary election is scheduled for 2018. Renzi is already under pressure to boost economic growth, and while generally complying with EU regulations, his government has clashed with Brussels and negotiated policy concessions from the EU. When it comes to banking and fiscal policy, EU regulations limit Italy’s options. The EU regulates deficit levels, as well as member states’ ability to rescue banks. The government, therefore, can be expected to increasingly sidestep EU rules — as it desperately seeks to reignite Italy’s economy and its own popularity.