By Conor Gallagher
While incoming Italian Prime Minister Giorgia Meloni and her Brothers of Italy Party (Fdl) certainly provide plenty of nationalist and culture war sound bites, they will ultimately be forced to follow EU and NATO marching orders, or they won’t be in power very long. Now that two cabinet picks from Meloni and her ruling coalition are coming into focus, it appears they’ve gotten the message.
Giancarlo Giorgetti from the right-wing League appears set to become economy minister. He was industry minister in the outgoing government of technocrat Mario Draghi and is viewed as moderate and pro-EU.
Giorgetti’s involvement in the Draghi government apparently won’t disqualify him despite one of the Fdl’s biggest selling points in the recent election was their opposition to the Draghi coalition.
As prime minister, Draghi pushed through structural reforms aimed at privatization, deregulation, weakening worker rights, and fiscal consolidation. The former vice chairman and managing director of Goldman Sachs International and president of the European Central Bank also led the charge on Russian sanctions leading to the European energy crisis, and further strengthened the EU’s stranglehold over the Italian economy.
European Central Bank Executive Board Member Fabio Panetta was reportedly Meloni’s first choice but didn’t want the position.
The appointment is being closely watched because it’s believed that if Meloni were to pick someone who wouldn’t follow through with Draghi’s “growth-enhancing reforms” the market could throw a tantrum.
Markets initially reacted with a collective shrug after Meloni’s victory. Nicola Nobile, lead economist at Oxford Economics, told Reuters:
The election results have not deviated from voting intentions. Mainly for this reason, we are not seeing strong shocks in the markets, which, in line with our baseline scenario, assess that election promises, which if implemented would put Italian accounts at risk, will be scaled back or abandoned during the government’s term of office.
The Fdl campaigned for higher pensions, welfare payments and a flat 15% tax for the self-employed, but it’s unclear how they will fit those promises into their budget without cutting from other social services or running the risk of upsetting Brussels and the market.
Besides, as a reward for Draghi’s reforms, the EU plans to give Italy 200 billion euros in economic relief funds—the largest payout allocated to a member state as part of the 800 billion euros NextGenerationEU plan to aid economic recovery from the pandemic. However, the funds, referred to as “tools” by European Commission President Ursula von der Leyen are conditional on Italy’s compliance with reform commitments.
The problems facing Hungary and Poland’s access to EU funds because of their refusals to toe the bloc’s line are an example for Rome – one von der Leyen wasn’t hesitant to point out in a not-so-subtle threat against Italy’s incoming government.
Additionally, in July the European Central Bank launched its Transmission Protection Instrument (TPI), which allows it to do “whatever it takes” to close euro spreads and theoretically avert future financial crises. Again any such assistance for Italy would be conditional on compliance with the EU’s fiscal rules and continuing with the “reforms” already locked in place by Draghi.
Italy has the biggest selling wave by foreign investors since the 2011/12 crisis. This is the “debt conundrum” we’ve flagged for over a year. The ECB can hold down yields to keep debt sustainable, but low yields mean private investors sell, so the ECB is increasingly on the hook. pic.twitter.com/Wxxi623AH5
— Robin Brooks (@RobinBrooksIIF) October 17, 2022
If the ECB backs off & stops supporting the Italian bond market, yields could skyrocket; solvency issues will become paramount. Italy would have a full-on banking crisis in no time at all. The ECB has used this power against Italy in the past to keep its various gov’ts in line.
— Marshall Auerback (@Mauerback) October 18, 2022
Situations like this are why the TPI is so controversial. From Reuters:
This leaves the ECB in the awkward position of determining which part of the spread widening is “unwarranted” – or giving up buying Italy’s bonds altogether.
That decision has legal implications, as intervening in the middle of a government crisis would provide fresh ammunition to those who have accused the ECB, via its market transactions, of breaking the law by getting involved in politics.
It likely wouldn’t be the first time that Brussels interfered in Italy’s politics. In 2011 former Prime Minister Silvio Berlusconi resigned after he claimed he came under heavy pressure from the EU and the US amid financial market turmoil and fears that investors could refuse to buy Italian bonds, sending Italy into default and breaking the single currency apart.
Berlusconi was followed by the technocratic government of former European Commissioner Mario Monti, who quickly enacted a series of austerity measures demanded by then-president of the ECB Mario Draghi.
Despite past statements praising Russian President Vladimir Putin and criticizing the EU, Meloni quickly switched to a pro-EU, pro-NATO stance during her winning campaign.
Antonio Tajani is the favorite for foreign minister. He was formerly the president of the European Parliament, but is probably most well-known as the EU’s “never-informed” car industry commissioner who allowed Dieselgate under his watch. From Euractiv:
Tajani was allegedly informed by the manager of an autoparts supplier about the manipulation of emissions tests and the existence of so-called defeat devices. The fact that Volkswagen was using such technology first came to light in 2015 when the Dieselgate scandal broke.
Aside from that, he’s a mostly unremarkable bureaucrat with a history of controversial comments targeting minorities and angering neighbors like Croatia and Slovenia.
The Fdl and its coalition have stated they will pursue NATO policies despite their lack of popularity in Italy.
Italians have some of the highest numbers in Europe in support of diplomatic solutions to the Ukraine conflict and ending sanctions on Russia, opposition to sending more military equipment to Ukraine, and the belief that the EU and US are to blame for the war.
Italy is actually one of the more pro-Russia countries in Europe, with strong longstanding economic and cultural ties between the two. For example during the Cold War, western Europe’s largest Communist Party was in Italy until the US helped to kill it with its Operation Gladio. Today the party is a shell of its former self.
Neoliberalism has ruled Italy for the past two-plus decades, and the results haven’t been pretty:
Annual net income of the Italian household, which was €27,499 (at constant 2010 prices) in 1991, declined to €23,277 in 2016—a drop in median living standards of 15%. Mean net household income fell by €3,108 between 1991 and 2016 or by about 10%. Italy is the only major Eurozone country that, in the past 27 years, suffered not stagnation but decline.
And the sanctions on Russia isn’t going to help make that any better. The Italian business group Confindustria just downgraded its expectation for GDP growth in 2023 to zero, from 1.6 percent forecast in April.
We’ll see how long Meloni and company can keep the people on board. Any straying from the NATO line would certainly draw the ire of Washington and Brussels, both of which are trying to strong arm countries into joining sanctions against Russia – whether they belong to the EU and/or NATO or not.
Any attempt by Italy to go against the NATO line would likely be met with financial repercussions via Brussels, and the US could threaten its two-way trade in goods and services with Italy that exceeded $103 billion in 2019, which represents Italy’s largest non-EU export market. Washington could cut military and industrial cooperation and potentially relocate some of its 10,000-plus military and Department of Defense personnel in Italy.
The Fdl and Meloni will likely continue to put on a nationalist show, such as her recent spat with France’s Minister for European Affairs Laurence Boone who warned that Paris would monitor the Meloni government’s respect for the rule of law.
While neoliberals have become unelectable in Italy (which is why someone like Draghi had to be appointed during the Covid crisis), the Fdl will be required to follow similar policies or Brussels will do everything it can to engineer a crisis to put someone in power who will.
Meloni and the Fdl are often compared to Hungarian Prime Minister Viktor Orban and his Fidesz Party who have been a thorn in Brussels side and have withstood pressure from the EU to remain in power for the past 12 years. But Meloni and the Fdl just won with 26 percent of the vote while Orban secured reelection earlier this year with over 50 percent of the vote despite running against six united opposition parties. Hungary also has its own currency, and when Orban was first elected in 2010 he shunned the EU and its austerity measures. His government launched direct support for households to help them repay loans and restructured the public debt, now mainly held in Hungarian forints rather than foreign currencies.
Italy doesn’t have the same flexibility, and the next in a series of never-ending crises is already at Italy’s doorstep: Meloni and the Fdl are facing an economic disaster because of the energy crisis, and yet they have promised to continue sanctions against Russia and military support for Ukraine.
Italian real wages are falling at the fastest pace in the EU, and it remains the only country in the bloc where wages have fallen since 1990. Temporary, low-paid contracts now account for the majority of new jobs and 5.6 million Italians — including 1.4 million minors — currently live in poverty, an all-time high. Inflation is driving down households’ real purchasing power, business and consumer sentiment is plummeting.
What should scare the technocrats in Brussels and Washington is that at some point someone with enough popular support comes to power in Italy who won’t be afraid of taking on the EU and NATO.
The politics costs of austerity: “Fiscal consolidations lead to a significant increase in extreme parties’ vote share, lower voter turnout, and a rise in political fragmentation… increasing distrust in the political environment”
Evidence from over 200 elections in Europe 👇 pic.twitter.com/PjCT08699r
— Philipp Heimberger (@heimbergecon) October 14, 2022