Italy's political instability brings new unease into the EU

EUROPEAN politics moved one step forward, yet potentially two steps back too this week. For while there was greater clarity on German politics, post-Merkel, Tuesday brought a new phase of political instability in Italy.

In a key Italian Senate vote on Tuesday night, Prime Minister Giuseppe Conte lost his absolute majority in the chamber following the withdrawal of the Italia Viva party led by former prime minister Matteo Renzi from the governing coalition. Mr Conte, who has governed in the euro zone's third largest economy since 2018, now faces a much more uncertain future at a time of continued Covid-19 emergency which could, in short order, see him needing to form a new administration, or the nation faces new elections amid the Covid-19 pandemic.

Mr Renzi objects to the specifics of Mr Conte's plan for spending 209 billion euros (S$336 billion) of EU recovery funds - the largest part of a continental-wide 750-billion-euro EU rescue effort from the pandemic. The former prime minister wants more investment in the digital economy and green energy, and rejects Mr Conte's plan to let technocrats, rather than elected politicians, decide spending priorities.

Even before Wednesday's vote, Italy was facing its biggest set of challenges since World War II. It has been ravaged by the health emergency of the last 10 months, and hit as hard as any European country, in absolute numbers of pandemic-related deaths (the latest figure is over 83,000), with the exception of the United Kingdom. Yet, it is the economic damage which will also be massive too with the country in its fourth recession in around a decade. Only this week, the government forecast that its debt will soar to a new post-war record level of 158.5 per cent of gross domestic output (GDP) this year, a phenomenal figure.

The period since the Covid-19 crisis began last March, which Mr Conte has called the country's "darkest hour", is not just unsettling for Italians. Internationally too, there is mounting concern, given that the country poses perhaps the biggest threat to the euro zone.

These worries extend to Germany, the EU's dominant state, where centrist Premier of North Rhine-Westphalia state Armin Laschet was elected leader at the weekend of Germany's Christian Democrats (CDU), the party of Chancellor Angela Merkel, who steps down from office this autumn. Mr Laschet's victory removed some of the uncertainty from the post-Merkel political landscape and he is now in a relatively strong position to succeed her when she steps down after 16 years in office.

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Yet, amid a changed political landscape following the pandemic, the new CDU leader is not guaranteed to become its candidate for chancellor in September's general election. German Health Minister Jens Spahn and Bavarian Premier Markus Söder, leader of the CDU's sister party the Christian Social Union, could also step into the ring this spring to challenge. Part of the reason why Mr Laschet is not certain to win out is his controversial decision to call in Spring 2020 for early relaxation of Covid-19 restrictions. With Germany now in an intensified lockdown, which will last till at least Feb 14, he has since retreated from that position but still has work to do to repair damage to his political credibility.

While Italy is less systemically important to the euro zone than Germany, international concerns about the new political uncertainty in Rome stems from its status as a key G-7 nation and perhaps the single weakest link, right now, in the single market area. The nation has the second biggest debt load in the euro zone, and its banking sector is under significant stress with massive under-performing loans. And this renewed economic angst comes in a wider context of public worry over corruption, and double-digit unemployment and low growth. Indeed, only Greece has fared worse in the euro zone over the last two decades.

And the spike in economic angst comes even before Italy's chronic political instability is fully factored in. The nation has seen 66 post-war governments and the future of the current centrist coalition is now in grave doubt amid continuing popularity of anti-establishment politics in the country. Fears are growing not just about the administration's instability - but also that, even if it remains in office, it is now less capable of securing the longer-term structural reforms that the country badly needs in the 2020s. This point was made by Mr Renzi on Wednesday when he opined the missed opportunity of Mr Conte not being able to make bolder post-pandemic changes saying "Italy is wasting its biggest opportunity since the Marshall Plan", a reference to the US aid for war-shattered Europe.

Even fresh elections might not break the current political paralysis given the unlikelihood of a very strong majority government emerging. In part, this is because of the introduction in recent years of a relatively new voting system that is two thirds proportional representation, and one third first-past-the-post, making it harder for any one single party winning an outright majority. The threshold for any single party having a working majority is now around 40 per cent of the vote which no party has come close to securing in recent years.

It is for this reason that many Italians want to see a review of the election law to see if a less proportional, more 'first-past-the-post' system, is better suited to the nation's needs going forward. This could therefore rehash the constitutional debate the country had in 2016 when Mr Renzi's planned reforms intended to usher in greater political instability to the nation were voted down in a national referendum.

Taken overall, the latest bout of Italian instability has offset the greater political clarity from Germany about the nation's post-Merkel future. The new unease in the euro zone, and beyond, is that Rome will now only be able to muddle through its biggest crisis since World War II precluding the reforms that the country badly needs.

• The writer is an associate at LSE IDEAS at the London School of Economics