Renzi and no fresh start in Italy

Italy’s former Prime Minister Matteo Renzi is seeking election on Sunday as general secretary once again of the social-democratic PD. After three years as head of government and having lost a constitutional referendum, the halo of the former high-flyer eager for reform has now long vanished. Nonetheless, Renzi is extremely well-placed to ascend his party’s throne once more, with Justice Minister Michele Emiliano and Andrea Orlando, governor of the southern Puglia region, failing to pose a serious challenge. While the Italian voters in the open election see no suitable alternatives to the two highly left-wing oriented candidates, many PD members are quite critical of Renzi on account of his moderate, pro-business policy. This led to a split of the left-wing faction from the PD in February, with the left-wing popular Five Star Movement now taking the lead in surveys. This has therefore probably curbed the interest of ruling PD party and meanwhile Renzi himself in early elections. It is doubtful whether Renzi can help get the party back on track again after the recent defeats. The Italians’ disillusionment with politics considering the ongoing economic and social problems, which made the Five Star Movement more popular, could be exacerbated further in light of the lack of courage among the social democrats to make a fresh start.

Following Macron’s success in winning the first round of the presidential elections in France and his good prospects now of victory over the right-wing populist candidate Le Pen in the run-off election, the focus (of the financial market) will presumably be more on Italy. The country is simply unable to get to grips with its structural problems. Because of a negligent budget policy, Italy remains the most heavily indebted country in the monetary union after Greece, even though the periphery state is one of the greatest beneficiaries of the ECB’s ultra-expansionary monetary policy. Some of the troubled big banks that have already been promised taxpayer-funded support by the government also represent a fiscal threat. At the same time, Italy’s economy has lacked momentum for several years, which is attributable not least to the sluggish reform process. The rating agencies are also highly critical of Italy. While DBRS already gave the country the thumbs down at the start of the year and Fitch one week ago, a downgrade at least by S&P of the rating outlook at the start of May is not ruled out either.

A consistent policy of reform is rendered virtually impossible by the frequent change of government that is inherent to the political system. Labour market flexibility would also be vital, among other things. The rejection of the constitutional reform at the end of last year also buried hopes of any imminent improvement in the ability of the government to make things happen or in Italy’s institutional efficiency. The popular but counter-productive promises and expensive pre-election concessions accompanying the scheduled parliamentary elections to be held in February 2018 will hardly contribute to the recovery of the eurozone’s third-largest economy. Even though the anti-Europe Five Star Movement would probably find it difficult to form a government coalition that would be able to secure a majority, its potential prospects for success alone are likely to contribute to further concerns, not only in Brussels but on the capital markets too. Furthermore, it cannot be ruled out that the populist party might even forge an alliance with Forza Italia which is already flirting with this idea. Bella Italia therefore threatens to slowly but surely replace France as the eurozone’s problem child.


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