At the start of the year I did a quick scan of what elections are coming up in Europe in 2018. The Italian election on Mach 4th caught my eye and I decided to do a little research on the the Italian economy, the general state of Italian politics and the key political players and parties heading into the election.
All three areas really captured my imagination but I quickly became concerned about the direction Italy is heading in and what tangible progress it has made since the worst days of the Financial Crisis and the European Sovereign Debt Crisis.
I wrote a little about Italy a while back when discussing the current states of the PIIGS but it was quite high level and I didn’t delve deep enough to really get an insight into the current malaise troubling many Italians and its economy.
The first thing to note is that the current global economy overall is as strong as it has been in a decade. There is positive news emanating from all across the globe, boosted by stronger than predicted economic performance in China, positive economic sentiment in Europe and the continued stock market bull run in the US (Trump’s tax deal may be a factor in the very short term to this but will ultimately be damaging in the long term).
However, the headline figures do not look good for Italy. The overall debt to GDP has continued to grow and stood at 132.6% of GDP at the end of 2016. This is dangerously high for a developed economy and compares very unfavourably to its peers in the EU (highlighted in red and blue in the chart respectively)
Other European nations had have had similar levels of debt but have benefitted from strong levels of growth recently as the overall EU economy enjoys a period of strong growth which has led to the lowering of their Debt/GDP ratios. Unfortunately, the growth in Italy has been quite slow and continues to lag most of its peers.
The Italian statistics office has estimated that YoY growth in Q3 2017 was 1.7%. This is the best figure since Q1 2011 and 2017 looks set to be the best year 2010. The growth is encouraging and has been welcomed by investors and pundits alike. If the growth continues like this over the next two to three years Italy may see itself in a more structurally strong state.
In relation to Italy, it does appear JFK’s old words hold slightly true; “a rising tide lifts all ships”. I say slightly as it more from those looking from the outside inwards than the feelings of every day Italians, many of whom still feel disillusioned and left behind.
The political situation is a lot more challenging. The current government is led by a coalition of centre-left parties under the leadership of Paolo Gentiloni and the Democratic Party (PD). The previous Prime Minister, Matteo Renzi, was performing well in polls and election. He may even have joined (in the eyes of the media at least) the ranks of young, progressive global leaders like Justin Trudeau and Emmanuel Macron. However, he fell on the sword of constitutional reform and resigned after the Italian electorate rejected his proposed changes.
In polls PD and its probable coalition allies are now significantly trailing the “centre right” coalition, of which the two largest parties are Forza Italia and Lega Norda.
The former is led by Silvio Berlusconi, the comeback “kid” of Italian politics whose resurgence has been partly fuelled by his promise for a flat tax rate for all Italians, initially starting at 23% but eventually moving down to 20%.
A flat 15% rate has been a campaign pledge of their key ally, Lega Norda (under the leadership of Matteo Salvini) for quite some time. It has proven popular with the electorate but is seen as quixotic by their opposition and most economists.
While austerity has certainly not been a purely positive factor for peripheral nations in the EU in recent years, abandoning fiscal prudence with such a policy like this could be absolutely devastating to the Italian economy, particularly when debt is already greater than 130% of GDP as previously discussed.
Another factor that could potentially be detrimental to Italy is the Lega Norda’s stance on immigration and their ties with other right wing parties in Europe. Salvini has come out quite strongly against Muslims in Italy with quotes like;
“The problem of the Muslim presence is increasingly worrying. There are more and more clashes, more and more demands. And I doubt the compatibility of Italian law with Muslim law, because it's not just a religion but a law. And problems can be seen in Great Britain as well as in Germany, so reassessing our coexistence is fundamental.”
This sounds a lot closer to what we associate with leaders in Hungary and other Eastern EU states then Italy’s traditional place at the heart of Europe as a founding member of the European Economic Community.
The X factor in Italian politics currently at the moment is the Five Star Movement. They are currently leading most polls to secure the most seats (I punted on them recently and the odds have dropped significantly since). They claim not to be a political party and neither see themselves on the left or right of the political spectrum.
They have dropped their pledge for a referendum on the euro but little else is known of their polices and aims apart from “transparency” and tackling corruption. In recent days, there has been more mootings for potential coalitions based on the numbers, though it is still difficult to envisage who they could go into government that would deliver a majority of seats in the Chamber of Deputies.
In all likelihood, they will get the most seats but the centre right will be the closest to forming a majority. In either case, it will lead to a stalemate with political uncertainty and paralysis until Italians go back to the polls or a centre right coalition with a heavy populist element and major tax cuts at a time when Italy has the second highest debt to GDP ratio after Greece.
The world is in a strange place currently where economic optimism is high and markets are performing well. Paradoxically, geopolitical risk is reaching levels not seen for quite some time. If Italy continues down the same path without clear reform or strategic direction it may be one of the biggest casualties globally in an economic downturn.
The good times cannot last indefinitely and ultimately it is the tough decisions you make in them that determine your ability to handle recessions.
Unfortunately for Italians, their political leaders have not yet identified these challenges, let alone started to tackle them…