After Mario Draghi was negated by some of the populists who made up his ruling coalition, Italians voted to give a group of right-wing parties, led by Giorgia Meloni and her party Fratelli d’Italia, 43% of the vote so far. (at a very low turnout), which will enable them to form a government – although important – these parties are not yet a cohesive group.
While there is some comfort in the fact that the likes of the Five Star have lost their votes – they and Lega have struggled with being associated with the Draghi government – Fratelli has gained a lot of ground and is now the largest party with 25% of the vote, a number of concerns both old and new will arise about Italy .
The first, the old one, is that the new government, in the absence of Draghi’s credibility, will erode market confidence and roll back the terms of the EU’s financial payments to Italy. It has already pushed Italian government bonds to high levels (well above 4%), and arguably Italy still looks like a model of fiscal rectitude compared to the UK’s Truss government (gold yields have exploded and sterling has collapsed), and Meloni has publicly acknowledged that, in terms of Simple, you are going to fight with Brussels. There is also the possibility that you will choose a reasonably respected technocrat as your finance minister.
A new concern, however, is that Meloni—which Americans should read in light of politicians like Mike Pompeo and Steve Bannon, will spend her time and political capital talking about “traditional” values—is primarily anti-LGBT. Ironically for a country with the lowest fertility rate in Europe, pro-family. This line of argument could cause a clash with Brussels.
Even more troubling from a geopolitical point of view, the new Meloni government, once formed, will likely oust Italy as a diplomatic player – something Draghi has defended – and raise fears that it will break the line in terms of a hard line toward Russia.
While Meloni has publicly vowed never to do it again, there is plenty of concern that Silvio Berlusconi (the godfather of the Forza Italia party) is a close sympathizer of Vladimir Putin, and in particular Matteo Salvini – the leader of the Lega party who is beneficiary of Russian generosity and under Moscow’s influence. . In this regard, the new Meloni government will have to be judged by its actions, not words.
From this point on, attention will focus on the government formation process, and here there are probably three general scenarios to consider.
- impasse- While the Democratic Party and the Center have not performed, the cohesion of the right is not taken for granted and the formation of the government may take some time, especially with strong personalities and a lack of clear policies across the right. This government may not last and elections in 2023 may be likely. The market volatility continued, but no crash occurred.
- Italian values- Our central scenario is that the right-wing parties led by Fratelli get enough votes to form a government. Once Meloni has maneuvered around Berlusconi, leading a new government with a technocratic finance minister. It sticks to the NATO line on Ukraine and does not oppose the conditions imposed by Brussels on Italy's finances, but continues its "campaign" on "values" at the expense of a more open society. Immigration becomes a prominent issue. The market is positive.
- ruptureA lower probability scenario is where right-wing parties come to power and show the courage that many of them are associated with — especially Salvini on Ukraine/Russia, Meloni on Europe, and Berlusconi on governance. Brussels and bond markets are losing confidence.
The middle scenario is most likely at this point. What is sadly certain, in the context of higher prices and greater market volatility, is that the Draghi era is over - his departure is a negative and a reminder that Italian politics is subservient to populism. The reform agenda is now dead, and poor economic performance is the norm.
More broadly, across the EU, the center is still holding, and at this point we are unlikely to see a widespread rise in party-linked populism in the new Italian government.