A new Italian government, composed of the populist Five Star Movement and far-right Lega Nord, has been sworn in on Friday (01.06). Giuseppe Conte, a former law professor, will lead the coalition as prime minster after months of political deadlock.
Why does it matter?
While Italy’s political future seems sorted for now, the wider repercussions for the European Union (EU) will only start unfolding now. Both parties have announced their intention of introducing a 15% flat tax rate and basic income. The proposed policies can be expected to further worsen Italy’s public debt levels (132% of GDP), putting the country on collision course with the EU’s budget rules.
As a result of the mounting public debt, ratings agencies would likely further downgrade Italy’s credit-rating, making it more expensive for the government to service its debt. Because Italy, accounting for 15% of the Eurozone’s GDP, is far bigger than Greece (the epicentre of the last Eurozone’s crisis), fears about the Euro’s future emerged.
A more confrontational relationship between Italy and the EU over matters ranging from fiscal rules to refugees can be expected. Special attention will be given to Mario Draghi, President of the ECB, to see how he deals with the Eurozone’s latest headache. An unfortunate side-effect of the Italian drama will be a further postponement of much needed European reforms. EU officials will be busy firefighting while domestic politicians will have a hard time convincing their constituencies of the benefits of more European integration against the backdrop of the rhetoric abroad.