By Antonia Colibasanu

Italy held parliamentary elections over the weekend, and although no single party won enough seats to form a government, there was a clear victor: anti-establishment parties. The populist Five Star Movement won the biggest single share of the votes – roughly 32 percent – and the center-right coalition, led by the anti-EU Northern League party, won the greatest combined share of the votes – roughly 37 percent. The results have set the country on a course of political deadlock, but an election in Europe’s fourth-largest economy may well have implications for the EU as a whole. No matter who will govern the country, one thing is certain: relations between Rome and Brussels will become more frayed.

Coalition Building

As a result of reforms to the electoral system introduced in 2017, parties in Italy now need more than 40 percent of the seats in parliament to form a government. This system strongly encourages coalition building, and with no single party reaching the threshold in the recent election, they will all now have to scramble to try to build an alliance with enough seats to govern. The coalitions that were formed before the election may not survive after the election, which may complicate negotiations even further.

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The EU’s preferred outcome would have been a coalition government formed by the Democratic Party – led by former Prime Minister Matteo Renzi, who stepped down as party leader following the election – and Forza Italia, which is led by former Prime Minister Silvio Berlusconi. The Democratic Party campaigned on a pro-EU platform, and Forza Italia has a moderate approach to the EU. But because together they won only about 30 percent of the vote, they don’t have enough support to form a government.

Forza Italia was part of the center-right coalition that also included the Northern League and the Brothers of Italy, both euroskeptic parties. As the party with the highest share of the votes in the coalition that won the most seats of any bloc, the Northern League can claim the power to decide how to try to form a coalition government. But the Five Star Movement, which wasn’t part of any alliance, also has a legitimate claim to form a government and said it would discuss potential coalitions after seeing the final results. The party’s leader, Luigi di Maio, raised the possibility of working with the League before the elections. Either way, it seems that an anti-EU party will lead the next Italian government.

Limited Progress

Politically, Italy has been relatively stable for the past five years. It has been run by a center-left government, which pushed for reforms to repair the damage done by the 2008 crisis. The country has made some progress in this regard. Unemployment, for example, dropped to 10.8 percent in December 2017 from a post-crisis peak of 13 percent in late 2014. But it remains well above pre-crisis levels, which were below 7 percent. Similarly, household purchasing power is up somewhat, albeit not as high as it was prior to 2008.

And Italy’s banking sector is in no better shape. Despite the fact that banks have managed to sell off some non-performing loans and that the government reached an agreement with the EU regarding state bailouts of banks, the level of NPLs is still high – about 16 percent of total loans, down from 18 percent in 2015. Italy, like any other country with such a high NPL rate, can’t eliminate the problem overnight. But a high rate of NPLs limits lending and investment across the economy, since banks must hold reserves to back up non-performing assets, limiting their capacity to offer new loans. Italy still has the highest debt of all EU members, now at about $2.8 trillion, over 130 percent of gross domestic product.

In fact, the country’s economic performance was one of the main themes of the recent election campaign. The data might show that Italy’s economy is recovering, but the social and economic problems facing the population haven’t improved. Youth unemployment remains above 30 percent and, while dropping over the past two years, it hasn’t come close to pre-2008 levels. At the same time, the economic disparity between the northern and southern parts of Italy has led to calls for increased autonomy in Veneto and Lombardy, two northern regions that grew tired of “subsidizing” the poorer south.

The refugee crisis has also contributed to growing fears that Italy will face even more socio-economic woes. Italy has taken in more than 600,000 migrants since 2014, with more than 180,000 arriving in 2016, mostly from North African countries. It’s seen as a problem caused by EU policies, but negotiations with Brussels have done little to solve the crisis. It was only after the Italian government came to an agreement in 2017 with Libyan militias to combat human trafficking that refugee flows into the country started to drop.

Italy experienced a similar wave of migration starting in the late 1990s. Most immigrants came from Eastern Europe, though some came from North Africa. Considering the country’s slow rate of population growth, Rome welcomed the migrants at the time. But the economic pain brought on by 2008 has led to increased resentment toward migrants. Three recent polls – two by Italian organizations and one by Pew Research Center – all indicate that both legal and illegal migration has led to increased fear of further social problems and racism.

With an anti-EU party likely leading the next government, Italy will be even more hostile to the EU. On one hand, Italy needs to continue working with the EU and, in particular, the European Central Bank, if it has any hope of finding a solution to its banking problems. On the other hand, it can’t agree with Brussels on many policies. Rome wants to impose measures, such as protectionist trade policies, that can jumpstart its economy, but its hands are tied because of its membership in the eurozone. The EU and Germany – the de facto leader of the EU – oppose such measures and insist on cutting government spending, maintaining greater oversight of southern eurozone members and resisting protectionism – policies that Italy resists. With greater integration of the eurozone, therefore, the already complex relations between Italy and its EU partners in Northern Europe will become even more problematic.

Antonia Colibasanu
Antonia Colibasanu is Geopolitical Futures’ Chief Operating Officer. She is responsible for overseeing all departments and marketing operations for the company. Dr. Colibasanu joined Geopolitical Futures as a senior analyst in 2016 and frequently speaks on international economics and security topics in Europe. Since 2012 she has served on the educational board of the International Academy of Advanced Studies in Greece, a summer program that brings together students from Eurasia and the Middle East. Prior to Geopolitical Futures, Dr. Colibasanu spent more than 10 years with Stratfor in various positions, including as partner for Europe and vice president for international marketing. Dr. Colibasanu is also an associate professor at the Romanian National Intelligence Academy and Bucharest University. Prior to joining Stratfor in 2006, Dr. Colibasanu held a variety of roles with the World Trade Center Association in Bucharest. Dr. Colibasanu holds a Doctorate in International Business and Economics from Bucharest’s Academy of Economic Studies, where her thesis focused on country risk analysis and investment decision-making processes within transnational companies. She also holds a Master’s degree in International Project Management. She is an alumna of the International Institute on Politics and Economics at Georgetown University.