Italy’s Political Drama Raises Stakes For Euro

ROME—Italy hurtled toward a political crisis that is reigniting debate over Europe’s future, including whether the eurozone’s third-largest economy should remain in the currency union.

The impasse, sparked by President Sergio Mattarella’s decision on Sunday to block the formation of a euroskeptic government, revived longstanding European fears that Italy, with €2.3 trillion in debt and a perennially sick economy, could trigger a new existential crisis in the eurozone.

European officials on Monday expressed the hope that Italy will stick to a pro-euro path, mindful of concerns that its exit could cause huge damage to Europe’s financial system.

The crisis comes amid a raft of challenges to the vision of a deeper political and economic integration promoted by Europe’s centrist establishment.

Eurozone members are divided over proposals to pool their budgets to provide mutual support in the event of a new debt crunch. Brexit, too, is presenting painful choices for both the U.K. and the rest of Europe, while Eastern European countries are repudiating Brussels in key areas such as the rule of law and immigration.

Italy’s emergency emerged from a weekend clash over the euroskepticism of the antiestablishment 5 Star Movement, the country’s largest single party, and the hard-right League party, which regard the euro as a failed project. Both have flirted openly with the idea of pulling Italy from the common currency.

On Sunday, President Mattarella rejected the choice of Paolo Savona, an 81-year-old euroskeptic economist whom the 5 Star and League parties had picked as their economy minister, an especially delicate role given Italy’s precarious public finances and weak banks. Mr. Savona, a former Bank of Italy official, has sharply criticized the euro and likened Berlin’s dominant role in setting eurozone economic policy to wartime aggression by Nazi Germany. The president said he feared a new government with Mr. Savona as economy minister could endanger Italy’s membership in the single currency.

On Monday, as the two antiestablishment parties protested his decision, Mr. Mattarella picked Carlo Cottarelli, an International Monetary Fund veteran, as prime minister-designate, and asked him to try to form a new government. The move stirred accusations that the president had usurped the popular will expressed in March parliamentary elections. The 5 Star and League together won about half of all votes cast.

Mr. Cottarelli, who headed the IMF’s fiscal affairs department, has vigorously defended Italy’s membership in the euro and led an effort to help bring Italy’s public finances in line through large cuts in public spending and waste.

Even if Mr. Cottarelli is able to form a new government, the prime minister-designate is unlikely to win a vote of confidence in parliament. Instead, he will likely lead a caretaker government only until fresh elections are called, which could occur in September.

The leaders of both the 5 Star and the League left little doubt that they would conduct an electoral campaign railing against the strictures of the common currency. That could make the vote a de facto referendum on Italy’s membership in the euro.

“It won’t be an election,” said Matteo Salvini, the 45-year-old firebrand head of the League on Sunday. “It will be a referendum between Italy and those on the outside who want us to be a servile, enslaved nation on our knees.”

European officials on Monday expressed concern about the developments.

Related Reading
Newsletter Sign-up

“We hope that Italy will have a stable, pro-European government soon,” said Michael Roth, Germany’s minister for European affairs.

However, the combative stance of Italy’s populists drew cheers from their brethren elsewhere in the region, signaling the pan-European importance the Italian impasse is assuming.

Marine Le Pen, leader of France’s hard-right National Front and an ally of the League, said on Twitter that “the European Union and the financial markets are again confiscating democracy. What is happening in Italy is a coup d’état, a holdup of the Italian people by illegitimate institutions.” In a statement, her party said that Italy is a victim of “financial fascism.”

A full-blown return to runs on Italian debt that threatened the survival of the eurozone in 2011 and 2012 isn’t visible so far. Yields on Italian 10-year bonds jumped to 2.63% Monday as prices of the bonds fell. That is the highest since late 2013, although far from the peak of more than 7% in late 2011. The euro weakened on the Italian news, while shares on the Milan stock exchange fell 2.1%.

The popularity of the 5 Star and League parties reflects the fact that Italian voters—like many in southern in Europe—still blame European institutions, Germany and financial markets for the country’s downturn in the past decade.

The European Central Bank, bowing to Germany pressure, demanded tight budgets and painful reforms from Italy as the price for a massive bond-buying program that convinced investors that runs on fragile eurozone countries won’t be repeated.

But continued economic pain in Italy, despite a broad recovery in Europe, has sowed doubts about the euro. The Italian economy is 5% smaller per capita than it was in 2001, the only EU country, other than Greece, to have shrunk over that period, according to think tank Promotor. Across the EU, per capita GDP rose 18%. Youth unemployment is slightly more than 30%.

Write to Giovanni Legorano at giovanni.legorano@wsj.com and Marcus Walker at marcus.walker@wsj.com

Appeared in the May 29, 2018, print edition.

Source Article