Italy goes to the polls this Sunday 27 September. This is a snap election forced on Italy’s president because the ‘technocratic’ government under former ECB chief Mario Draghi fell after he lost majority support in parliament. That support was lost, partly because Draghi vigorously backed NATO support for Ukraine against the Russian invasion – something that both the leading right-wing parties and the leftist Five Star were less keen on – and partly because the Draghi government was determined to keep to the fiscal strictures of the EU Commission in return for the huge EU regeneration package that Italy would receive to revive the economy after the COVID slump.
If the polls are correct, Italy will emerge from its general election on Sunday with a new far-right government led by arch-conservative Giorgia Meloni, president of the Brothers of Italy, a party that has rocketed to prominence from nowhere since the last inconclusive election in 2018 (see my report here). Meloni and her populist ally Matteo Salvini, leader of the League (which has lost huge support to the Brothers), together appear poised for a decisive victory over a deeply divided centre-left.
This would mark Italy’s first experiment with far-right rule since fascist dictator Benito Mussolini, after a total of 69 ideologically diverse governments since the second world war. Both Meloni, a conservative firebrand whose political career began as a teenage activist in the youth wing of the neo-fascist Italian Social Movement, and Salvini, who was an ardent admirer of Russian president Vladimir Putin, are Eurosceptics.
However, there are differences that will be revealed after the new government is formed. While Meloni has pledged to continue Draghi’s policies of military support for Ukraine and would take a tough line on sanctions on Russia, Salvini on the campaign trail has publicly complained of the toll sanctions are taking on Italy’s economy.
The two right-wing leaders are united in fierce opposition to immigration and support for conservative “family values”. But while Meloni is a staunch Atlanticist (pro-US) who advocates repressive national security policies, Salvini’s support base includes companies that had close business relations with Russia until the invasion.
The new right-wing government faces two immediate issues. The first is the energy-driven cost of living crisis that is hitting all of Europe. The cost of electricity in Italy is second only to the UK in price. And gas from Russia constituted over 40% of all energy supply.
Italy’s immediate economic future is dependent on getting the €200bn EU package to help reboot its chronically underperforming economy, and so avoid a debt crisis. Italy has a huge public debt at 150% of GDP and the cost of the servicing this debt is rising as global interest rates rise. That could lead to foreign investors selling Italian bonds and provoking a debt servicing spiral. The ECB is standing by with special bailout measures for such an event. But the hope remains that a new government will sustain fiscal probity and balance the books in order to receive the EU largesse planned over the next few years.
That means any ‘radical’ right-wing government is faced with a dilemma: will Meloni break with the EU and adopt spending and economic policies similar to that proposed by the Brexit UK government under the new PM Liz Truss or Orban in Hungary; or will Meloni stick to EU strictures? It looks like the latter. Meloni has vowed to respect fiscal rules and has been urging prudence and caution. This has been greeted with approval by Italy’s finance class. “They want to be perceived as a party that you can do business with and can govern the country,” Lorenzo Codogno, a former director-general of the Italian Treasury, says of the Brothers of Italy. But we should not be surprised at that. Mussolini’s government always backed business and finance during his fascist rule. It will be no different with Meloni, or even Salvini.
But then successive Italian governments of both left and right have generally kept to fiscal rules. Indeed, Italy’s governments have run primary budget surpluses (surplus before paying interest on debt) for year after year. Indeed, Italy has so far also been a net contributor to the EU budget. In effect, Italy has been in permanent austerity to cover its debt costs.
The problem for Italy is not profligate government spending, but the shocking failure of Italian capitalism to grow and boost the productivity of the workforce to compete with the likes of Germany, France (the other G7 economies in the Eurozone) or even with Spain.
Italy is still the second most important EU location, behind Germany, for industrial production, mainly due to the economic structures in the northern regions. And it ranks third in exports of goods, just behind France, leading on mechanical engineering, vehicle construction and pharmaceutical products.
But Italy has become the ‘sick man’ of Europe if real GDP and productivity growth is the measure. After the early post-war recovery boom, Italian capital was exposed as particularly corrupt and oligarchical. Inequality between rich and poor and between industrial northern Italy, close to Germany and France, and rural southern Italy has remained very wide.
The oil-price-crisis of the 1970s exposed that even more, leading to political turmoil and economic decline. Italian productivity growth began a steady decline from the 1970s, turning negative in the years after Italy joined the euro area. The average annual rate of growth per head in Italy since the adoption of the Euro (1999-2016) has been zero. For comparison purposes, that of Spain has been 1.08, that of France 0.84 and that of Germany 1.25 per cent. The other three countries that adopted the Euro at the same time as Italy grew, on average, by about 1 per cent every year since the introduction of the Euro, while the Italian economy has stagnated.
Average annual real growth per head in Italy, Spain, Germany and France. (1999-2016).
Italy’s demographics are particularly bad; with a rising share of older people. That means employment growth is low. This is coupled with a high rate of youth unemployment (around 25%), which means value-creation from the potentially most productive part of the human labour force is neglected. The share of long-term unemployment among these unemployed young people is as high as 40%, according to Eurostat, mainly because of limited education and living largely in the Italian South. Less than 20% of the Italian labor force has had some tertiary education. As a result, over the decades, the more highly-skilled Italians have left the country, worsening domestic economic performance. Combine low employment growth with low productivity growth and no wonder the Italian economy has a low long-term potential growth rate of no more than 1% a year.
Productivity growth has stagnated because Italian capital is not investing productively enough. Investment levels are still well below that reached before the Great Recession.
And the reason for that is clear. The profitability of productive capital in Italy has fallen sharply over decades, but particularly after joining the euro area and after the global financial crash.
While the profitability of Italian capital after WW2 was much higher than in Germany and France, because of hugely cheap labour and the use of American credit to redevelop Italy’s inter-war industry, the profitability crisis of the 1970s hit Italy’s weaker economy harder than in Germany and France. The neo-liberal recovery period from the 1980s helped Italian capital somewhat as the EU region expanded. But entry into the Euro area soon put Italy at a competitive disadvantage to Germany, where profitability rose up to the Great Recession.
None of Italian capital’s failures will be dealt with by the new right-wing government. They will do no better than previous centre-left, centre-right or ‘technocratic’ Italian governments. Indeed, they are likely to make things even worse, alongside adopting reactionary and anti-labour policies to sustain their coalition.