Foreign Correspondence

[Amaunet]

Italy: Challenges Beyond the Elections

14 April 2006
On April 10, Romano Prodi, head of the center-left coalition, won the Italian general election with a slim majority. Current Prime Minister Silvio Berlusconi refuses to concede defeat and is calling for a complete revision of the ballots cast. At the same time, Italian President Carlo Azeglio Ciampi announced that he wants his successor (who will be elected in mid-May) to appoint Prodi as prime minister. These two factors have placed Italy in a political stalemate precisely at a time when the country needs political stability and needs to pass almost draconian economic reforms to help its struggling economy. [See: "Economic Brief: Italy's Weak Economy"]

On April 9-10, Italians went to the polls under a controversial new electoral law that was conceived by Berlusconi's government and was expected to favor him, yet instead the law assured the center-left coalition with victory. Because of the new law, Prodi's coalition will have 341 seats (against 277) in the lower chamber and 158 seats (against 156) in the upper chamber. Thus, unless revisions change the results, which is highly unlikely, the center-left will not need to form a "grand coalition" with its rivals. It will, however, have to govern in a delicate political framework.

However, since the election of a new president will be followed in June by a scheduled referendum on constitutional changes as well as administrative elections in various regions, the context appears particularly difficult.

What is most urgent for Italian and international decision-makers, however, is to successfully predict major political and economic issues that will mark the next 6-12 months.

Politically, the most urgent question is the viability of a center-left government that showed much less strength than was expected, notwithstanding its victory. Equally important, international political groups are trying to anticipate Rome's new political orientation in European politics and in the U.S.-led war on terrorism. From an economic point of view, global actors want to know how safe it is to conduct business in Italy whereas domestic forces try to figure out what measures will be taken to tackle unemployment, insufficient growth and the lack of productivity rate.

Center-Left Coalition's Expansion Has Limits

While Berlusconi's declining popularity -- in comparison with his 2001 election win -- was predictable, many center-left politicians and observers seem not to have realized how much Forza Italia (Berlusconi's party) is rooted in Italian society, and particularly in the northeastern regions of Lombardy and Veneto. As a consequence, the election's outcome was significantly different from what many respected analysts predicted since Forza Italia remains Italy's first party. Apparently, the center-left's allegedly state-oriented, less liberal tax policies have been punished by voters.

Berlusconi's strength within the center-right coalition remains sufficient to allow him to dominate the opposition, whereas the center-left hoped the Christian-Democrats (who actually doubled their votes from 2001) could assume a key role in the right-of-center political spectrum and guarantee a softer opposition.

What likely happened is that in the northeastern regions, where the majority of Italy's small to medium enterprises are based, voters showed more confidence in Berlusconi's economic strategy and fiscal promises.

Also, the center-left coalition still suffers from weaknesses within its structure since its many parts have different agendas, notwithstanding cooperative electoral rhetoric. Should major crises erupt in the international arena, more pro-U.S. factions, such as the centrists, may easily find themselves at odds with neo-communist forces.

In addition, the coalition risks being blocked by endless debate over the constitution of a Democratic Party. The latter is conceived as a natural heir of the D.S. (Left-Democrats) and Daisy (pro-Prodi centrists and Christian-Democrats) electoral alliance. While voters seem to appreciate the center-left's efforts to enhance its political unity and coherence, the Democratic Party's actual social rooting remains to be tested.

Hence, Prodi's first task will be that of enhancing his coalition's political strength and unity, while Berlusconi's right-of-center alliance will probably maintain considerable political influence, which may provide him opportunities to destabilize the ruling majority as the latter begins to implement economic policies.

Beyond the Elections: Economic and Foreign Policies

Italy's economic context is marked at present by a split between two kinds of influential players: on one side are the so-called "big capitalists" who gathered around Confindustria (the organization of Italy's industrial elite) and are predominantly pro-European, while at the same time enjoying support by many continental and U.S. financial powers.

On the other side are the small to medium enterprises -- particularly strong in northeastern regions -- whose perception is that big national groups successfully exploit statist policies and suffocate the "animal spirits" of Italian capitalism.

Such a split was adroitly used by Berlusconi during the electoral campaign, as he presented himself as the champion of the small to medium entrepreneurs' interests, and will likely remain impossible to eliminate in the next couple of years. Thus, another big challenge for Prodi's coalition will be to regain as much confidence as possible from so-called "autonomous workers."

The latter are wrongly assumed to be massively pro-Berlusconi. In fact, they are also inwardly split as many voted for change. Normally, they tend to perceive Italy's state employees as being unduly protected, and demand that market-oriented reforms be quickly introduced

However, Italy's mainstream economic thinking is still divided between neo-liberals and neo-Keynesians, whose proposals concentrate mainly on re-launching the demand for consumption. Italy, though, appears also in need of re-structuring its industrial production and offerings. As a recent O.E.C.D. study shows, the country lacks good performance in basic scientific research, high-tech, education, and productivity rates, as well as in job creation capability. Additionally, Italy seems to suffer from international competition precisely because of these flaws. [See: "Economic Brief: Italy's Weak Economy"]

Although re-launching research and development and education, as well as freeing the animal spirits of Italian capitalism, is a shared goal among decision-makers, the effective implementation of reformist strategies carries substantial tactical challenges. Presumably, proposals to change labor laws will split the new government as the more leftist factions oppose liberal-oriented reforms and prefer deficit-spending and neo-Keynesian policies to tackle joblessness. The main danger for the new government will be the inability to choose a consistent political strategy; this failure will perpetuate Italy's economic decline. A possible, pragmatic solution to this puzzle, as suggested by center-left politicians, may be to successfully harmonize labor flexibility and security following the pattern set in Denmark.

Obviously, such a strategy demands political unity and an excellent diplomatic capability in managing relations with trade unions and social actors -- political qualities that remain to be tested.

As far as foreign policy is concerned, Prodi will likely prove more Europeanist than Berlusconi, and henceforth a rapprochement with Berlin, Madrid and Paris is predictable. However, the center-left's vision of Europe (a closer union and continental federalism) risks becoming outdated as France, Germany, the U.K., and Spain are undergoing political changes.

Prodi's government will be presumably much more E.U. Commission-friendly than the previous one, but this fact won't help Brussels re-launch the idea of a European super-state if neo-protectionist orientations consolidate in Paris and Madrid and if London's next majority will be a conservative -- and less Europeanist -- one.

Also, if Prodi's recent words are followed by concrete measures, expect Italy's new government to try making Rome a key hub for Asian commercial flux, thus challenging those who want to put custom duties against Chinese and South Asian goods. In this respect, the E.U. Commission may find an ally in its anti-nationalist strategy; at the same time, however, many small to medium enterprises may be scared, thus radicalizing the right-wing factions' anti-Chinese and pro-duties rhetoric.

With regard to Prodi's claim to quickly withdraw troops from Iraq, it may cause friction with Washington, but Rome's commitment to the Afghan and Balkan missions will continue. Moreover, the withdrawal is likely to be carried out in an orderly manner and in accordance with Washington. In the end, a serious crisis in U.S.-Italy relations seems unlikely.

Conclusion

Prodi's start will be difficult and slow. The country's basic problems risk growing even larger before the new executive can begin to topple them, thus prospects don't look promising in the near term. The search for enhanced internal cohesion is critical for the new majority if it wants to avoid being destabilized by opposition forces. Since financial markets are likely to react negatively to any sign of weakness and instability, such a quest for stronger unity will occupy much of Prodi's time during the rest of 2006. Should he succeed, the coalition's political program will have good chances of being implemented from 2007 onward.

Report Drafted By:
Dr. Federico Bordonaro



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