For those with long memories, the mess in Italy this week might not seem like such an aberration. Turmoil in electoral politics is the norm. As recently as two years ago, Matteo Renzi, the youngest prime minister in Italy's history, resigned after losing a perhaps justified and completely ill-advised referendum on constitutional reform.
Or go back to the period from the Second World War to 1993, when the country on average changed governments about every 11 months. Or the 1990s and 2000s, the era of Silvio Berlusconi, who is now barred from holding political office because of his tax fraud conviction, but who campaigned this year anyway. Enough said.
So maybe Italy-politics fatigue explained the muted market reaction to the remarkable coalition that emerged from the fractious election that began on March 4. The nebulous Five Star Movement (5SM), which won a plurality of votes, and the hard-right League party are hardly the stuff of investors' dreams. But when the two anti-establishment parties turned their attention to forming a government, the Borsa Italiana stock exchange fell by only about 1.5 per cent; bond yields rose only marginally.
One supposes that stability, in any form, is better than nothing. And the coalition's policy platform, vague as it was and despite its populist sentiments, at least did not signal an attempt at full withdrawal from the European Union or the destruction of the eurozone.
Now, all bets are off. And that is thanks largely to President Sergio Mattarella. On Sunday, Mattarella — whose position is considered largely ceremonial, or at least used to be — effectively rejected the coalition by vetoing its nomination of an anti-EU economist as finance minister, and then moved to install a pro-EU and former International Monetary Fund executive as prime minister (who has since withdrawn from consideration). So there is no government right now — and hasn't been one since December. Which, even by Italy's standards, is a long time.
Maybe Mattarella thought that nixing the coalition would save Italians from themselves. But what he's really done is set off a political and constitutional crisis, and potentially an economic one. And markets are now paying attention. Between last Friday and Tuesday, the Italian stock exchange shed 5.6 per cent; the pain bled into European markets, as well, with the EURO STOXX 50 falling almost three per cent this week. Yields on Italian bonds soared, which is something for a country that has a government debt-to-GDP ratio of 132 per cent.
What's worrying investors, and no doubt EU officials, is that a new election will give the populists another kick at the can. This time, 5SM and the League might well take a harder anti-EU/anti-euro stance, which given the nature of Marranella's intervention might find favour with Italians. Fears of an Italexit, a la the Grexit crisis of 2016, are now on the rise.
Well, investors should be so lucky. Grexit ended up just fizzling away, more or less. There was no real contagion to the rest of the eurozone. And it might turn out the same with Italy. The initial market reaction to the crisis is probably overdone; we will likely have months to figure out what it all means, when (if) a new government is formed.
So is all this turmoil just a Borgias-esque sideshow Hardly. The fact is, Italy and its economy have real problems. For one thing, unemployment remains in the double digits — at nearly 11 per cent — which is far above its pre-recession levels. It's even worse for youth, about one in three of whom don't have a job. And the top-line unemployment numbers mask the fact that Italy has one of the lowest labour participation rates in Europe, above only Greece and Croatia in 2016. The economy, while growing, hasn't been doing it very fast: with 1.5 per cent GDP growth last year and probably this one, Italy is a laggard in what has been a renascent eurozone. It's hard to see the economy growing out of its massive government debt, which stands at 132 per cent of GDP — the fourth highest mark in the world, behind Japan, Croatia and Greece.
One big problem is the Italian labour force, which is inflexible and expensive, whose productivity lags far behind other industrialized economies, and which is split between (heavily unionized) permanent employees — who enjoy relative job, wage and pension security — and temporary workers, many of them young, who don't. Also, thanks to a complex and disorderly system of supports, many unemployed, again particularly the young, don't have access to employment insurance, job training or job opening information. Successive Italian governments have tried to fix all this, but with little tangible success so far, in part because a lot of the old arrangements have been grandfathered in.
In that context, the rise of populism is hardly surprising, especially among young people, who disproportionately support 5SM and the League. And to be fair, some of the coalition's ideas might have helped, including a guaranteed income, incentive programs to increase labour force participation (especially among women), and massive spending on employment centres. The question, of course, was how the coalition planned to pay for all those things — and its wacky idea of floating so-called mini-BOTs, which would be a form of IOU issued by the government to folks it owes money, hardly inspired confidence in its overall economic sanity.
A populist government, with its unsavoury shades of anti-immigrant and ultranationalist sentiment, would hardly be the panacea its leaders promised Italians. But now even that's off the table, at least for now. The only sure thing is that the political mess in Italy will take a long time to clean up — and the economic mess will take even longer.