Italy gets a new government – the eurozone hokey-cokey is on hold for now

At the start of the week, Italy looked like it was heading for fresh elections.

The president had blocked the appointment of a eurosceptic finance minister (imagine Philip Hammond, except he wants to leave the EU). As a result, the two populist parties trying to form a coalition had stormed out.

Italian bond yields shot up. The Italian stockmarket plunged. It was all looking a bit like the Greek crisis all over again.

But now, it appears, Italy may have a government after all.

Take political commentary with a big bucketful of salt

It looks like Italy’s odd-couple coalition is going to take charge of the country after all.

The right-wing League’s defining characteristic is that it’s anti-immigration. As for the Five Star Movement, newspapers are bemused as to how to define them. The FT just describes them as “anti-establishment”. They want more government spending (oh, so they’re left wing?) but they also want to cut taxes (oh, so they’re right wing?).

Let me digress for a moment here. This confusion offers an interesting illustration of how difficult it is to judge another country’s politics by your own experience.

The traits we instinctively associate with the left and the right in Britain are informed by our history, our class system, and a system of tribal signalling that we are learning through osmosis from the day we are born.

Italians have an entirely different class system, history, and set of tribes to us. So do Americans. So does any other country – the sense of a shared culture, one that is distinct from other cultures, is fundamentally what drives independence movements, for example, whether they make economic sense or not.

In some contexts, these cultural differences are insignificant. When the good times are rolling, and everyone loosely agrees on the big issues – like globalisation, for example – then the differences are merely charming or amusing.

But when it comes to politics during periods of change, the details make a big difference. When countries hit harder times, and have to change direction, the details are what they cling to. What values are fundamentally Italian? In a time of sweeping change, what values are non-negotiable – regardless of what that means economically – and which are up for grabs?

I’m digressing like this because it’s quite important. You’ll read all sorts of people making pronouncements on what “must” or “should” or “will” happen during political crises. But these views are mostly worthless, because politics is complicated and, to outside observers particularly, irrational.

You need only read a selection of US commentators opining confidently on Brexit, for example, to realise that most of them have no idea what they’re talking about (regardless of whether or not you agree with their underlying political position). Instead, they’re just telling a wee story about something called Brexit that happens to support their own view of how the US should be run.

Similarly, a lot of the commentary about Italy on this side of the Channel is tinged with feelings about Brexit. A subset of “leave” voters want to see Italy causing trouble for the EU because they feel it proves their point. Meanwhile, a subset of “remain” voters are ardently defaming Italy and Italians across any online forum they can find, because they’re projecting their hatred for what they see as “thick” Brexiteers onto them.

Remember – Italy is not about Brexit. Italy is about Italy. Anyone who makes it about anything else is almost certainly missing the point.

This phase of the Italian crisis is over for now

OK. So, getting back to the story.

Markets freaked out this week when Italy looked like it was heading for fresh elections. The fear was that the coalition could have united to campaign on a much more aggressively eurosceptic platform. The “who runs Italy?” narrative could then have put into power a team that wanted to ditch the euro and tell the EU to clear off.

Instead, last night, the prime minister chosen by the coalition – Giuseppe Conte – gave the president (Sergio Mattarella) a new list of ministers. The controversial choice for finance minister has instead been given the job as minister for EU affairs (I’m sure that’ll be fun to watch). The president has accepted the list, and the coalition is now free to form the new government.

So is that it, crisis over? For the time being, the answer appears to be “yes”.

The president clearly realised that fresh elections would not generate any sort of outcome that made things better. Equally, the coalition politicians must have realised that they were taking a risk, too.

It’s all very well talking about defying the EU when it comes to raising government spending or cutting taxes – that’s an easy sell. As soon as you cross the line into suggesting that the currency might change – that’s a much harder proposition.

In effect, we have another classic eurozone fudge. The populists will probably get to bend the spending rules as long as they don’t get too mouthy about it. And the European Central Bank (ECB) will likely now take a more confident air at its next meeting. The recent slowdown in eurozone economic data will give it enough cover to be vague about the end of quantitative easing, but it won’t have to bring up Italy specifically.

So, bearing in mind what I rambled on about above, where could I be wrong? What am I missing?

Maybe the coalition will be more aggressive towards the EU than I expect – or vice versa. Those are certainly possibilities.

The big difference between Greece and Italy is that Italy has more clout. This is probably where the main risk lies, too. Once in power, the coalition may feel it can push back against the EU harder. The EU may feel that its best option then is to allow a repeat of the past week – allowing bond yields to soar, so that Italy gets a glimpse of what could happen if it does leave.

That sort of brinkmanship could easily go wrong, and it could easily happen again, given the egos on all sides, and the EU’s penchant for intemperate language.

But again, the sticking point is the euro. As was the case with Greece, it’s one thing to be anti-EU, but it’s quite another to be anti-euro. I doubt many Italians are keen to see their euro savings converted back into lira.

In short, I suspect it’ll be a bumpy ride. But for the moment, a repeat of the Greek scenario has been averted. And I’d argue that the next big moment at which a crisis really could flare up is the 2019 handover of the reins of the ECB.

By the way, a quick point on Spain for those who are wondering. The political situation there is chaotic too – and Catalonia is clearly a very messy issue – but whoever ends up in charge there is basically pro-European, so there is not much prospect of an existential crisis there (as yet).