Ahead of the Italian elections on 4 March, opinion polls suggest an increasingly fragmented political scenario, with a hung parliament and likely difficulties in having a parliamentary majority in support of a new government. But what will the vote mean for Italy's relations with the EU? Lorenzo Codogno discusses the three most important themes in the Italy-EU relationship

Codogno, Lorenzo

LSE Research Online

How	will	Italy’s	election	affect	its	relationship	with	theEU?Ahead	of	the	Italian	elections	on	4	March,	opinion	polls	suggest	an	increasingly	fragmented	politicalscenario,	with	a	hung	parliament	and	likely	difficulties	in	having	a	parliamentary	majority	in	support	of	anew	government.	But	what	will	the	vote	mean	for	Italy’s	relations	with	the	EU?	Lorenzo	Codognodiscusses	the	three	most	important	themes	in	the	Italy-EU	relationship.Credit:	Giorgio	Montersino	(CC	BY-ND	2.0)The	outcome	of	the	Italian	elections	remains	highly	uncertain.	It	will	be	a	fight	among	three	major	forces,	whichindividually	are	unlikely	to	command	an	outright	majority	of	seats	in	parliament.Detailed	plans	to	enhance	Italy’s	lacklustre	growth	and	reduce	the	worryingly	high	debt-to-GDP	ratio	are	shockinglyabsent	from	the	electoral	debate.	How	will	this	electoral	event	affect	the	relationship	between	Italy	and	the	EU	aheadof	important	talks	about	the	future	of	European	governance?A	hung	parliament	would	lead	to	a	lengthy	and	challenging	discussion	on	some	form	of	broad	or	narrow	grandcoalition	that	would	bring	together	the	mainstream	parties.	There	is	also	a	small	but	not	negligible	probability	thatanti-euro,	anti-establishment	parties	will	manage	to	get	a	better-than-expected	result	and	then	team	up	together	tosupport	a	new	government.How	did	Italy	get	to	this	point	of	political	fragmentation	and	growing	anti-European	sentiment?	A	decade	ago,	Italywas	among	the	most	pro-euro	countries	in	Europe,	with	a	long	history	of	being	one	of	the	staunchest	advocates	forfurther	integration.	In	the	most	recent	Eurobarometer	survey,	only	59	Italians	out	of	100	were	in	favour	of	a	Europeaneconomic	and	monetary	union	with	one	single	currency,	the	euro.	It	was	the	most	Eurosceptic	outcome	among	thecountries	participating	in	monetary	union.This	significant	shift	in	attitude	could	be	attributed	to	the	three	most	problematic	points	in	Italy’s	relationship	withEurope:	fiscal	policy,	immigration	and	the	banks.LSE European Politics and Policy (EUROPP) Blog: How will Italy’s election affect its relationship with the EU? Page 1 of 3		Date originally posted: 2018-02-19Permalink: http://blogs.lse.ac.uk/europpblog/2018/02/19/how-will-italys-election-affect-its-relationship-with-the-eu/Blog homepage: http://blogs.lse.ac.uk/europpblog/The	prolonged	and	deep	recession	led	Italy’s	real	GDP	to	contract	by	almost	10%	between	the	pre-crisis	peaks	ofthe	first	quarter	of	2008	to	the	trough	of	the	first	quarter	of	2013.	Since	then	the	economy	has	recovered,	although	itwas	still	5.7%	below	pre-crisis	levels	in	the	fourth	quarter	of	2017.	Since	the	first	quarter	of	2008,	the	performancegap	versus	the	Eurozone	has	widened	to	13	percentage	points.	Unemployment	moved	from	5.7%	in	April	2007	to13.0%	in	November	2014.	Since	then	it	has	declined	to	10.8%.The	popular	narrative	is	that	Brussels	contributed	to	deepening	the	crisis	by	forcing	Italy	to	implement	tight	fiscalpolicies	or	so-called	austerity.	Under	the	pressure	of	financial	markets	during	the	European	sovereign	debt	crisis,Italy	increased	the	structural	(cyclically-adjusted	and	net	of	one-offs)	primary	balance,	which	is	the	best	measure	offiscal	stance,	from	0.6%	in	2009	to	4.0%	in	2013,	with	an	almost	2.5	percentage	point	tightening	in	2012	alone.However,	since	2013	there	has	been	a	moderately	expansionary	policy,	which	has	brought	this	metric	down	to	1.7%in	2017,	according	to	European	Commission	data.Even	after	the	elections,	no	matter	which	party	or	coalition	wins,	the	Italian	government	is	unlikely	to	tackle	the	issueof	the	high	debt-to-GDP	ratio	forcefully	and	decidedly.	The	Partito	Democratico	(Democratic	Party)	is	mostly	pro-European,	although	with	some	populist	and	anti-austerity	flourishes	(former	PM	Renzi	repeatedly	tried	to	increasethe	deficit	leeway),	and	mostly	pro-reform,	although	the	positive	momentum	has	declined	sharply.Berlusconi’s	Forza	Italia	is	mostly	pro-European	as	well,	although	with	a	Eurosceptic	spin.	The	introduction	of	aparallel	currency	(Am-lire)	was	mainly	Berlusconi’s	idea,	not	his	party’s.	Plans	to	sharply	reduce	taxation	and	partlyunwind	the	pension	reform	are	in	contradiction	with	the	stated	objective	of	a	4%	primary	surplus	(against	anestimated	1.5%	in	2017).	Its	overall	stance	towards	the	EU	remains	constructive,	however,	and	there	are	no	plans	forItalexit.A	Northern	League-led	government	would	make	the	stance	towards	the	EU	and	the	euro	more	problematic.	Italexithas	been	toned	down,	but	not	entirely,	and	the	introduction	of	a	parallel	currency	(mini-bot)	has	not	been	dismissed.The	Five	Star	Movement	appears	to	have	put	aside	the	idea	of	a	referendum	on	the	euro	and	the	proposal	for	aparallel	currency,	but	they	could	resurface	at	a	later	stage.	The	fight	against	fiscal	rules	and	the	so-called	Europeanstraightjacket	would	mount.Immigration	is	another	major	topic	of	the	electoral	campaign,	possibly	the	most	important	one,	especially	followingthe	shooting	of	Africans	by	a	neo-Nazi	in	Macerata.	Italy	does	not	have	a	long	tradition	of	welcoming	foreignimmigrants,	despite	all	humanitarian	efforts	to	save	them	in	the	crossing	of	the	Mediterranean	Sea.	Foreign	‘regular’residents	accounted	for	only	8.3%	of	the	population	in	2016.	However,	that	percentage	goes	up	to	14.1%	whenlooking	at	the	18-39	year	age	group,	with	a	high	concentration	in	Northern	Italy	and	major	cities.With	a	fertility	rate	of	just	1.35%	and	the	natality	rate	at	0.8%,	Italy’s	population	is	ageing	fast.	Meanwhile,	in	2016,115,000	Italians	moved	abroad,	a	number	which	has	steadily	increased	over	the	past	few	years	–	giving	rise	toconcerns	about	a	brain	drain.	Italy	will	desperately	need	skilled	migrants	as	its	population	continues	to	shrink.The	massive	demographic	shift	and	the	socio-political	implications	that	follow,	makes	the	immigration	issue	all	themore	delicate.	Until	recently,	neither	Italian	nor	European	authorities	have	been	able	to	provide	adequate	policies	totackle	these	difficult	issues.	Anti-establishment	parties	are	calling	for	a	massive	change	in	policies.	The	Five	StarMovement	and	far-right	parties	would	seek	to	pull	Italy	out	of	the	European	Union	if	Brussels	refuses	to	re-negotiatefiscal	and	immigration	rules.	Any	such	government	would	be	off	to	a	rocky	start	in	the	relationship	with	Brussels.Finally,	banks	have	been	a	tough	issue	to	manage,	putting	much	strain	on	Italy’s	relationship	with	Brussels.	Finding	asolution	to	address	the	undercapitalised	banking	system	burdened	by	a	mountain	of	Non-Performing	Loans,	has	notbeen	an	easy	task.	In	no	other	country	in	Europe	have	savers,	and	thus	voters,	been	exposed	to	bank	bonds	in	thesame	way	as	in	Italy.	It	is	thus	no	surprise	that	banking	issues	have	become	political.	Finding	a	solution	to	addressthe	undercapitalised	banking	system,	burdened	by	a	mountain	of	NPLs,	was	not	an	easy	task.Though	the	situation	has	improved,	it	remains	a	weak	spot	in	the	relationship	with	the	EU.	Nevertheless,	anymainstream	government	would	be	strongly	supportive	of	a	swift	completion	of	the	Banking	Union.	In	the	riskreduction-risk	mutualisation	equation,	Italy	can	now	put	on	the	table	an	already	achieved	reduction	in	banks’	risk.	Itwould	probably	be	willing	to	compromise	on	a	gradual	and	moderate	reduction	of	the	position	in	government	bonds	inthe	portfolio	of	banks,	therefore	opening	up	a	possible	compromise	with	Germany	on	the	European	DepositInsurance	Scheme.LSE European Politics and Policy (EUROPP) Blog: How will Italy’s election affect its relationship with the EU? Page 2 of 3		Date originally posted: 2018-02-19Permalink: http://blogs.lse.ac.uk/europpblog/2018/02/19/how-will-italys-election-affect-its-relationship-with-the-eu/Blog homepage: http://blogs.lse.ac.uk/europpblog/Italy’s	long	tradition	of	supporting	pro-European	policies	and	economic	integration	will	likely	be	continued	by	anymainstream	government,	albeit	with	slightly	different	sensitivities	and	approaches.	However,	anti-establishmentparties	have	pledged	to	fight	for	more	sovereignty,	which	would	put	the	country	on	a	collision	course	with	an	idea	of	amore	integrated	Europe.Much	ado	about	nothing?	We	will	find	out	soon.Please	read	our	comments	policy	before	commenting.Note:	A	shorter	version	of	this	article	first	appeared	on	the	website	of	Europe’s	World,	the	policy	journal	of	Friends	ofEurope.	The	article	gives	the	views	of	the	author,	not	the	position	of	EUROPP	–	European	Politics	and	Policy	or	theLondon	School	of	Economics._________________________________About	the	authorLorenzo	Codogno	–	LSE,	European	InstituteLorenzo	Codogno	is	Visiting	Professor	in	Practice	at	the	LSE’s	European	Institute	and	founder	andchief	economist	of	his	own	consulting	vehicle,	LC	Macro	Advisors	Ltd.	Prior	to	joining	LSE,	LorenzoCodogno	was	chief	economist	and	director	general	at	the	Treasury	Department	of	the	Italian	Ministry	ofEconomy	and	Finance	(May	2006-February	2015).	Throughout	this	period,	he	was	head	of	the	Italiandelegation	at	the	Economic	Policy	Committee	of	the	European	Union,	which	he	chaired	from	Jan	2010to	Dec	2011,	thus	attending	Ecofin/Eurogroup	meetings	with	Ministers.	He	joined	the	Ministry	from	Bank	of	Americawhere	he	had	worked	over	the	previous	11	years.	He	was	managing	director,	senior	economist	and	co-head	ofEuropean	Economics	based	in	London.	Before	that	we	worked	at	the	research	department	of	Unicredit	in	Milan.LSE European Politics and Policy (EUROPP) Blog: How will Italy’s election affect its relationship with the EU? Page 3 of 3		Date originally posted: 2018-02-19Permalink: http://blogs.lse.ac.uk/europpblog/2018/02/19/how-will-italys-election-affect-its-relationship-with-the-eu/Blog homepage: http://blogs.lse.ac.uk/europpblog/

How will Italy's election affect its relationship with the EU?

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How will Italy's election affect its relationship with the EU?

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