The crisis cannot be resolved with a populist or anti-EU choice, says Italia Viva

LONDON – Italy’s latest political crisis will not ultimately lead to a populist or anti-EU government being installed in Rome, a former minister told CNBC as the country seeks a new government in the midst of a pandemic.

Italy is facing new political uncertainty after former Prime Minister Matteo Renzi withdrew his support for the current coalition government. His small party – Italia Viva – backed the Five Star Movement and the Democratic Party, two pro-EU parties that have been in power since summer 2019.

However, differences over the spending of upcoming European recovery funds prompted Renzi to withdraw his support and trigger the resignation of two Italia Viva ministers. This included Elena Bonetti, the former Minister for Family and Equal Opportunities.

“What we are not willing to do is forge an alliance with a populist, anti-European right-wing government,” Bonetti told CNBC’s Joumanna Bercetche when asked about possible future government formations.

The tripartite alliance was vital in keeping anti-EU politicians away from the government during a previous political crisis in the summer of 2019. But support for anti-immigration and anti-EU parties is solid in Italy, where Lega and the Brothers of Italy are currently first and third respectively.

“We believe that we should place Italy’s future prospects firmly in a European context. So no populist or anti-European choices will be made,” Bonetti said.

Financial markets have in the past responded to comments from anti-EU politicians in Italy who suggested, for example, that the country would be better outside the eurozone – the 19-member region in Europe where countries share the same currency.

The latest crisis has led to an increase in the yield on the 10-year Italian benchmark bond over the past week, but overall the impact on the market has been somewhat limited.

The European Central Bank is making massive purchases of government bonds as a result of the pandemic and the European Union will release an unprecedented level of fiscal stimulus across the region. The monetary and fiscal responses have lowered financing costs for European governments.

But Italy’s political crisis comes at a particularly challenging time, with Covid-19 infections showing no signs of slowing down, and economic damage that could lead to a 10% contraction of GDP (gross domestic product) by 2020.

Prime Minister Giuseppe Conte is due to address the current crisis next week, but it is still unclear whether he will maintain his position and which parties may come together to form a new government.

“Conte could take some time to reflect on his move as he tries to find enough lawmakers from other parties to fill the gap left by Renzi’s party,” said Wolfango Piccoli, co-president of the Teneo research firm. , in a note. the current crisis may drag on for some time.

There are three main options for resolving the deadlock: a new coalition government, perhaps with a different prime minister; a government mainly formed by people with no political affiliation but with essential technical knowledge; or quick elections, which the ruling parties want to avoid.

“We continue to believe that Conte is likely to hold the lead,” Federico Santi, senior analyst at Eurasia Group consultancy, said in a note, attributing this scenario a 40% chance.

He also said that “quick elections remain unlikely for the time being,” but if they were to take place, “government parties would likely face serious setbacks in the event of elections, likely to pave the way for a right-wing Eurosceptic government.”