August 29, 2019 / 11:37 AM / 19 days ago

Breakingviews - Italy’s odd coalition offers deceptive stability

5-Star Movement leader Luigi di Maio speaks to the media after consultations with Italian President Sergio Mattarella in Rome, Italy, August 28, 2019.

MILAN (Reuters Breakingviews) - Italy’s newfound political stability is deceptive. The left-leaning Democratic Party and maverick 5-Star Movement are set to form an administration led by outgoing Prime Minister Giuseppe Conte. If confirmed, the new coalition will avert an election and a clash with Brussels. Yet, historic distrust and diverging views of business risk making this alliance as fragile and fractious as the previous one.

The short-lived coalition between 5-Star and the eurosceptic League, led by Matteo Salvini, deserved the thumbs down. Its popular support depended on welfare handouts and scaremongering about immigration. It paid little attention to necessary investments in infrastructure and schools, and failed to reform Italy’s slow justice system. Salvini’s hostility towards the European Union also stoked fears among investors that the country may quit the euro and default on its 2 trillion euro debt, pushing up borrowing costs for companies and consumers.

With Salvini out of government, relationships with Brussels should be smoother. In his first remarks as incoming prime minister on Thursday, Conte said Italy will be faithful to its role as a founding member of the EU, a marked change of tone from Salvini’s threats to disregard EU commitments, including the bloc’s budget rules. The prospect of calmer political waters has renewed investors’ interest in the country’s debt. The yield gap between 10-year Italian government bonds and German bunds is at its narrowest for a year.

The optimism is only partly justified, though. The new coalition partners are political arch-rivals. Comedian Beppe Grillo founded 5-Star a decade ago to defeat the Democratic Party, which he called elitist and corrupt. The two allies broadly agree on the need to reduce inequality and make the economy greener. But 5-Star is markedly less business-friendly. As industry minister in the previous government, 5-Star leader Luigi Di Maio tried to kill large infrastructure projects, including the high-speed rail link between Turin and the French city of Lyon. He also advocated revoking Atlantia’s motorway concessions following a fatal bridge collapse in 2018.

The partners have a strong incentive to get along. Both the Democratic Party and 5-Star dread fresh elections, which opinion polls suggest would produce a hard-right executive led by Salvini’s the League. Yet even that may not be enough for such odd bedfellows to stick together for very long.

Breakingviews

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