Italy's Populist Election Victory -- Is It Too Late to Save the Euro and the EU ?

TODAY'S REAL NEWS IS ABOUT ITALY'S ELECTION AND THE EU REACTION. France 24 asked last week : "Can Italy’s battered left prop up a 'Five-Star' government?" Matteo Renzi, the leader of the badly beaten Democratic Party, says an alliance between his PD and the Five-Star Movement is not in the cards. • • • THE PARTY MIX IN ITALY. In Benjamin Dodman's report for France 24, he says : "For years, the Democratic Party has been the main target of the Five-Star Movement’s anti-establishment bile. But in the quicksand of Italian politics, an alliance between the two is now one of the few plausible options for forming a government. He’s going, but not just yet. Italy’s former prime minister Matteo Renzi said Monday he would quit the leadership of the center-left Democratic Party (PD) following its crushing defeat in Sunday’s general election. Crucially, however, Renzi added that he would steer the PD’s sinking ship until after a new government is formed. There is an obvious reason for Renzi’s delayed resignation. He is desperate to avoid an unnatural alliance between his party and the election’s big winner, the establishment-bashing Five-Star Movement, which is in need of allies to secure a majority in parliament. 'The Italian people have asked us to be in opposition and that is where we will go,' Renzi told reporters, adding that the Democratic Party would not be 'a prop for anti-system forces.' Renzi, 43, said he would act as a 'guarantor' that his party makes no compromise with the 'wind of extremism' that has swept Italy." • March 4th's inconclusive parliamentary election produced two winners -- the Five-Star Movement (M5S), now unquestionably Italy’s dominant political force, and the anti-immigrant Lega party, which has overtaken Silvio Berlusconi’s Forza Italia as the biggest player on the conservative side. Both have claimed a mandate to form a government, but neither has a majority in parliament. The two big losers were Berlusconi, who failed in his latest comeback attempt, and the Democratic Party, which has seen its support collapse after five difficult years in power. Of the two, Renzi’s PD has suffered the biggest blow, losing two-thirds of its seats in parliament. But the remaining 112 DP lawmakers will be the most popular in the coming weeks as negotiations begins to see which groups can form a governing coalition -- neither the M5S nor the Lega has enough seats in parliament to govern alone. The PD has more in common with the Five-Star Movement than with the center-right coalition, particularly one dominated by a Eurosceptic and increasingly far-right Lega, and the M5S and DP may be able to use their somewhat similar environmental protection, anti-corruption and economic policies to stitch together a coalition. • But, Luciano Fontana, editor of the Corriere della Sera newspaper, told France 24 that M5S’s economic platform “is not only left-wing, it is almost far left...featuring greater protectionism, a universal basic income for the poor, boosting public investments and freezing privatizations.” Analysts have suggested a smaller left-wing party, called Free and Equal, could be thrown into the mix as a “glue” to hold M5S and the PD together. And, Pierangelo Isernia, a professor of political science at the University of Siena, notes that M5S draws support from both the left and the right -- and rarely speaks with one voice : “Five-Star has a very ambiguous stance on the European Union and it wants to shred the budgetary constraints Italy has signed up to [under the Democratic Party],” Isernia told France 24, adding, “Some of its members even want to quit NATO.” • For now, the principal obstacle to an M5S / PD coalition is Renzi himself. Last week, he challenged party members favorable to a deal with M5S to “come and say so openly.” The fact that Renzi hand-picked his party’s candidates in most constituencies means most of the surviving PD lawmakers are likely to toe the line, at least for now. But some PD dissidents have already begun to push for a change. Michele Emiliano, governor of the southern Puglia region and a leading critic within the PD, said his party could offer "external support" to a M5S government. In an interview with Il Fatto Quotidiano, Emiliano attacked Renzi for not stepping down immediately : "In order to hang on, he is willing to stall the political system." France 24 says : "Should the likes of Emiliano eventually prevail, both the Democratic Party and the Five-Star Movement will be wary of alienating voters. The refusal to compromise with 'corrupt' establishment parties has always been Five-Star’s guiding principle. Any perception of cosy deals is bound to anger many of its core supporters. Conversely, the PD will find an alliance with the political upstarts a hard sell after all the abuse it received while in office." • And, the dissidents in the ranks of the PD are also surely aware of the disastrous junior-partner socialist SPD role in the conservative grand coalition of Merkel in Germany that last September led the SPD to its largest defeat since its beginning after WWII. Professor Isernia says : “An alliance with Five-Star could be a suicidal partnership for the PD. Such unbalanced coalitions have always been to the detriment of Europe’s left-wing parties. And in this case, it would mean playing junior partner to an extremely unpredictable bedfellow.” • • • THE NORTH-SOUTH DIVIDE IN ITALY. There is another problem in Italy -- the geopolitical split between north and south. Italy’s president, Sergio Mattarella, will be conscious of this when he begins formal consultations with party leaders later this month. The enduring divide between the prosperous north and the poor south was increased by March 4th's election, with the right's Lega tightening its grip on the north and the left's M5S sweeping the south. France 24 reported that : "In Sicily, where the center-right coalition won regional elections only six months ago, Five-Star’s victory was so emphatic it didn’t even field enough candidates to fill all the seats it won." Isernia says : “Italy has always been governed on two legs : the southern leg and the northeastern one" -- the industrial northeast is home to many of the small and medium-sized businesses that have long formed the backbone of Italy’s economy. Isernia warns : “The Christian Democrats [who ruled postwar Italy until the early 1990s] and then Berlusconi’s various governments had both those legs, but the center-right has now lost the southern leg to the Five-Star Movement....President Mattarella belongs to the PD and may be tempted to reach out to his party to guide the inexperienced Five-Star Movement in their first attempt at government. On the other hand, he will be wary of leaving the wealthy, powerful and increasingly right-leaning north of the country feeling unrepresented. If Five-Star teams up with the PD, it would be the first time we have a government without the northern leg. At this point, anything is possible. But I very much doubt it would produce a stable and lasting administration.” • Reuters journalist Crispian Balmer reporting from Rome says : "Long divided along economic lines, Italy is now also politically cleft after Sunday’s elections, with the anti-elite 5-Star Movement triumphing in the underdeveloped south and the right predominating in the wealthy north. Whoever ends up governing the country after the inconclusive March 4 ballot will not be able to ignore the gaping chasm, but will face deeply conflicting demands from the two halves of a fractured nation, and few funds to remedy the situation. The split between the industrialised north and the deprived south has never been so stark and is likely to have profound implications for Italy and Europe for years to come." Lucio Caracciolo, co-founder of the MacroGeo think-tank and a member of the Italian Foreign Ministry’s Strategic Committee, told Reuters : “The south is moving beyond the point of governance. The disparity between the north and the south is so great that I think it will eventually provoke some sort of geopolitical crisis in Italy. You are already beginning to see the facts on the ground.” • The Mezzogiorno, or “noon” as the south is called in Italian, has lagged the rest of the country for decades, but the recent financial crisis has exacerbated the problem. Its economy shrank 7.2% between 2001-2016, according to latest data, while Italy’s output grew 1% over the same period and the European Union's by 23.2%. Unemployment in the south stands at almost 18% versus 6.6% in the north, with youth unemployment at 46.6% -- more than double the level in the north. With 4.7 million Italians living in absolute poverty, the M5S has promised to introduce a monthly minimum income of up to 780 euros ($960) for the poor -- a godsend in a country which offers no basic welfare for the jobless. Reuters says : "Although many analysts say heavily indebted Italy can ill-afford the plan, there is little doubt it convinced almost half of all Italy’s unemployed to vote for 5-Star, according to pollsters, with the party becoming the lodestone for the disaffected and disenfranchised. This helped it become the largest single party nationwide and partly explains its unparalleled success in the south, which used to back mainstream center-left or center-right groups." Caracciolo told Reuters : “People used to vote for established parties expecting to get something back, but instead we have witnessed the sack of the south," referring to the greater state funding received by the north for many years. Caracciolo says : “Now people are putting their faith in this new party in the hope that it will finally do something, but it might be too late. The situation down here is tragic.” M5S won 76 out of 80 first-past-the-post seats in the lower house of parliament in Italy’s eight southern regions, winning almost 50% of the vote in Sicily and Campania. By contrast, it picked up just three out of 90 first-past-the-post seats across six northern regions, including the wealthy Lombardy and Veneto, where the far-right Lega led the center-right bloc, whose main economic proposal was a flat tax of 23% -- an attractive idea in the productive north but of little interest in the south, where the average annual wage in 2016 was barely 16,000 Euros ($20,000), a salary which already falls into the current 23% tax band. Reuters says that although "talks have yet to start on forming a new government...the next coalition is bound to include either 5-Star or the Lega, which make up the two largest blocks of seats in parliament. They could even try to work together, sharing a similarly iconoclastic approach to politics, but their flagship campaign pledges are mutually exclusive. Not only could Italy never afford both a universal wage and a flat tax, but the two measures would likely anger opposing voters. Southerners would view a flat tax as a generous gift for their rich co-nationals, while the universal wage would be seen in the north as unjustifiable charity for the south, which has a reputation for laid-back living and rampant criminality." • Former Ferrari boss Luca Cordero di Montezemolo told Reuters that the Mezzogiorno needs “a business plan” rather than handouts, adding that “the problem of the south has become by far the number-one problem (for Italy).” And, the "problem" is growing. Italy’s eight southern regions all rank lower than 155th among 202 EU regions in a 2017 European Commission survey on the quality of public services, with five rating worse than 190th for corruption, highlighting a woeful state of governance. The EC survey highlights one of the south’s most glaring problems -- its infrastructure, including public transport and railroads. Adriano Giannola, chairman of Svimez, an industrial group that advocates for southern Italy, says the "lack of hope and opportunity has led to an exodus, with a net 716,000 people emigrating from the Mezzogiorno, mostly to the north with some going abroad, in the past 15 years, more than 70% of them aged 15-34. Between now and 2065 it is estimated we will go from a population of 20 million to 15 million....We will just be a place for the old and for tourists. We don’t have any time left. We need to react.” • And, the real question is whether the Five-Star Movement, absolutely new to national government, can begin to solve these geopolitical problems facing Italy. Caracciolo told Reuters : "Even if the inexperienced 5-Star lead the next government, they will struggle to reverse years of neglect, mismanagement and nepotism that have scarred the south. Southern Italy is a very important geopolitical region. It sits in the middle of the Mediterranean. The rest of Europe is aware of the problems and are worried by what they see." • • • "THE REST OF EUROPE" IS WORRIED ABOUT ITALY. PERIOD. Aurora Bosotti wrote for the UK Express last Friday that : "The Italian election 2018 marked the end of the center-left government as the Eurosceptic center-right coalition headed by the Lega and the Five Star Movement came out victorious at the polls. • Experts suggest the latest Italian election could kickstart the end of the European Union project. Philosopher Slavoj Zizek claims that Italians, in addition to dealing a blow to the EU because Italy is one of its founding members, have rung an alarm bell for the European left. Zizek told the Express : "The radical left proved it’s inability in Greece where the Syriza Government ended up as the most faithful enabler of austerity politics. The latest election results in Italy, as well as the fragile coalition in Germany, also demonstrate that the moderate social-democratic left is just gradually flattening." Italian center-right parties secured 37% of the vote while the M5S became the largest single party in the country as it soared from nowhere to over 30%. Zizek added that the rise of populism in Europe is a result of the "left's failures" to present viable plans for the future to voters. Speaking to BBC, Zizek said : "A new opposition is replacing the traditional polarity of moderate left and moderate right. It’s the opposition between the liberal establishment and the rightist populism as a reaction to it." • Agreeing with Zizek's predictions, the northern conservative Lega's leader Matteo Salvini mocked the defeated center-left Democratic Party and its leader Matteo Renzi after the incumbent government crashed at the polls, losing more than 10% of its followers and failing to secure the numbers needed to form a majority government. Salvini said : "I won’t comment on the debacles of others. Matteo Renzi and his party’s arrogance was punished. I can’t wait to start." • But, in Brussells, the EU finance chiefs are panicking that the Euro could be facing a rapid decline because of the duel threats of the surge in support for Eurosceptic parties in the Italian election and a trade war with the US under President Trump. Both the Northern league and the Five Star Movement have spoken out against closer EU integration and have made their distaste for the Euro single currency clear. With President Trump refusing to back down on his tariffs for steel and aluminium, the EU has threatened retaliation, but sees no real quid-pro-quo tariff for shutting EU steel out of the US -- blue jeans, Harley-Davidsons and bourbon whiskey are not in the same league. Meantime, the Euro has fallen and bounced backin a 2% range against the dollar since the beginning of February, but it has not gained new ground, and EU banking chiefs worry a further slowdown is coming. The British pound is holding its own against the Euro, despite Brexit, and European Central Bank president Mario Draghi's reassurances that all is well in the EU are not falling on receptive ears in the financial community. The ECB is currently increasing its bond-buying strategy as part of a massive stimulus. But German trade figures point to a decline in export growth and there is concern other countries could face a similar future. And Brussels is worried that dialling back the ECB quantitative easing bond-buying support could see Eurozone growth completely unravel. • • • WHAT'S IN STORE FOR THE EU? Italy’s populist goal of quitting the Eurozone could spell the end of the Euro in a wide range of countries, and Italy's new government, when it is formed, could even challenge the future of the European Union. • So, not only the Euro, but also the EU itself, may be facing an existential crisis. David Kohl, strategist at Julius Baer, told the Financial Times : “The odds remain unchanged that the Euro will correct [down against the dollar] to 1.20 in the short term as the currency has failed to rally sustainably on the back of less dovish ECB rhetoric.” • And, although the EU leadership is putting a brave face on Trump's import tariffs of 25% on steel and 10% on aluminium, European Commission Vice President Jyrki Katainen says : ”We need a dialogue with the United States. It's clear. We need clarity. We are an ally, not a threat. This is not a trade negotiation. Now we are talking about unilateral action against international rules, and we want to sort it out before it really becomes a problem." The European Commission, which coordinates trade policy for the EU -- the world's biggest trading bloc -- now has the possible problem of steel and aluminium flowing into Europe to avoid the new US tariffs. The EC has said it's ready to impose safeguards, tariffs or quotas to protect its own steel and aluminium industries from products diverted to Europe because of the US measures and is monitoring incoming metal flows to see whether a surge occurs. The EU is also threatening counter-measures that would target US imports ranging from corn to motorcycles, and may soon publish its list to allow industry and other interested parties to give their input. Under World Trade Organization rules, such counter-measures have to be in place within 90 days of the US tariffs entering force. • What European leaders cannot understand vis-à-vis President Trump is exactly what they cannot understand about the European populist parties -- they represent a new world order that wants to divest itself of political elites in order to do what is best for their own citizens. That concept, absolutely fundamental to western democracy, has been abused and kicked to one side, and now the "upstart" parties like the German AfD, French FN, and Italian Five-Star are hauling it out of the ashes of UN globalism to make it the central principle in their promeses to their citizens. • While she is in serious political trouble herself, German Chancellor Merkel needs to understand this. She has always led by listening to everyone and then finding the common denominator as her solution. Now, Merkel has the new issues of her own drubbing by the populist AfD, the populist party win in Italy, and US tariffs to confront. Handelsblatt said last week, quoting Reuters : "The strong arm of the EU may be too tough on trade. As the White House prepared to impose hefty tariffs on steel and aluminum imports, a divide is opening up between the European Union and Germany about how to respond. While the EU has angrily threatened reciprocal taxes on US goods, Berlin is urging the EU to de-escalate the conflict before it gets out of hand. US Treasury Secretary Stephen Mnuchin left no doubt Wednesday that the tariffs were imminent." In fact, the tariffs were issued last Thursday. And, in Brussels EU Trade Commissioner Cecilia Malmström said that peanut butter, orange juice, bourbon were on a long list of US exports that the European Union will tax in response to steel tariffs in Washington. While she said Europe did not want a trade war with the US, it was now a question of “protecting our economy and our workers from serious threats.” And, just a few days ago, the EC president Jean-Claude Juncker even seemed to threaten to sue Great Britain if it negotiates a steel tariff exception with the US. Merkel apparently does not agree with either approach. And, Mrs. Merkel usually wins in the EU because she has the checkbook. • • • DEAR READERS, the French AFP news outlet reported that the leader of Italy's populist-right Lega party, Matteo Salvini, told European Parliament reporters on Tuesday that the Euro was a "mistake" but he did not want a chaotic exit from the single currency. Salvini, whose party got most votes in the right-wing coalition in Italy's general election, said he would not hesitate to breach EU spending rules if he became prime minister. The March 4th ballot resulted in a hung parliament with the maverick anti-establishment Five Star Movement the biggest party but short of a majority and struggling to find coalition partners. Salvini says he has the "right and duty" to govern Italy, although his coalition with ex-PM Silvio Berlusconi's more moderate rightwing Forza Italia party fell short of a majority. And, we should remember that Salvini's allies in the European Parliament are the leaders of the Eurosceptic populists, including Marine Le Pen and Geert Wilders. Salvini said if he becomes the prime minister of Italy, the Eurozone's third largest economy, he will not feel bound to stick to the EU's 3% deficit-to-GDP ratio. The 3% limit, says Salvini, "is part of the European rules that have been imposed," adding, "If it's possible [to follow the rule] I will do it, but if respecting the three percent means job losses or social catastrophes, we will not accept it." That is almost a given, since Italy has been running over of the 3% limit for years, as have many EU member states. It is the restrictive fiscal requirement that caused such austerity hardship for Greece, Ireland, Spain and Portugal. But -- in a move reminiscent of the north-south divide in Italy -- the northern rulers of the EU refused to step in to help southern member states who were suffering from a requirement not suitable for less industrial economies. The anti-EU, anti-immigrant Italian Lega wants to renegotiate European treaties and rules which Salvini says have "negative repercussions for Italians. If we can't do it, I don't rule anything out, but an improvised exit from the Euro is not desirable and it's not something we want." Salvini says his party is working on a "plan B." This is exactly what the EU leadership fears, because a renegotiation of the EU treaties would almost certainly either end the EU or drastically cut back its powers. • For people in Asia and the US, these internal EU issues and divides may seem remote. But, with fiscality, trade and security so closely linked today, what happens in Europe will affect everyone. It is time for the EU and the EC elites to forget their privileges and status and roll up their sleeves to listen, understand, and prevent the revolt now getting closer and noisier -- before it is too late to save the EU "experiment."