Super Sunday crunch time for Europe

Across Europe, it’s being hailed as Super Sunday. It’s when Italians voters head for the polls in one of the most fascinating and fraught elections for decades, but also the day when the result will be known on whether Germany’s Social Democrats (SPD) will back a new coalition with Angela Merkel.

And the two are bitterly linked.

After months of infighting between Italy’s political parties, it’s looking like a close race between the three main parties: the 5 Star Movement (M5S), the ruling Democratic Party, and Silvio Berlusconi’s Forza Italia. Before the opinion polls were stopped two weeks ahead of the vote, the left-leaning populist M5S was leading the pack with about a third of the votes.

The most likely outcome of the result – which will be announced on Monday afternoon – is that Sunday’s vote will lead to a hung parliament and parliamentary stalemate. Due to new electoral laws, political parties have to win 40% of the threshold to have a governing majority in both chambers and, to date, the M5S, has ruled out joining any other party.

This opens up the door for a coalition between the centre-right parties, Forza Italia led by the 81-year-old Silvio Berlusconi, and Lega, the anti-immigration and highly eurosceptic party run by Matteo Salvini. An alliance between Berlusconi and Salivini, backed by Giorgia Meloni’s right-wing Brothers of Italy party (FDI) (which is highly critical of Brussels), is another option being touted.

While Meloni is seen as a rank outsider, her anti-EU and anti-immigration rhetoric has been quietly whipping up support for the FDI. On a provocatively timed trip to visit Hungary’s Prime Minister Viktor Orban this week, she was quoted by the Corriere della Sera newspaper as being more interested in what’s happening in Eastern Europe, and the Visegard countries, than the Franco-German axis that ‘now commands Brussels’: “I am interested in what is happening in Eastern Europe, the group of Visegrad, nations that are trying to defend European borders from the uncontrolled immigration that someone else would want, to defend the real economy from the great financial speculation that instead rages in Brussels and defends the European identity from the risk of Islamisation in Europe.

But leading a centre-right coalition is not Berlusconi’s only option: this is Italy after all. It’s also being suggested that he could cosy up to the ruling Democratic Party to cut a deal. What the four times Prime Minister – who cannot stand for office – has said is that he will propose that Antonio Tajani, the president of the European Parliament, be the new Italian prime minister. In an interview earlier this week, Berlusconi said: “Everyone can understand that he would be an excellent candidate because Italy doesn’t count for anything anymore in Europe or in the world. He would count an awful lot because he is the president of the European institution which is directly elected by European citizens.”

But Tajani’s pro-Brussels credentials would pit him against Salvini’s Lega, which wants to leave the euro and reform relations with the EU. Tajani, who was one of the founders of Forza Italia, became president of the EU assembly in January last year when Martin Schulz left the role to return to lead the Social Democrats ahead of Germany’s last election. In one of those delicious ironies of fate, Schulz led the SDP to the worst post- war election defeat and was forced to quit the leadership last month.

Quite how Berlusconi’s plan of installing Tajani would work  is anybody’s guess. Tajani’s pro-Brussels credentials would pit him against Salvini’s Lega, which wants to leave the euro and reform relations with the EU. But, if achieved, such a move would also send a more positive message to Italy’s European neighbours, and to nervous financial markets, that Italy is taking a more benign approach to the EU.

So you can see why it may take weeks for any new coalition to take shape. And if the results are more finely balanced than those being predicted, there could be another election.

If Italy’s warring political factions appear fractious, then its economy is even more tortuous. Whether its stalemate or an unlikely majority for one or other of the main parties, analysts fear the result upset the financial markets already nervous over Italy’s debt and banking crisis. Italian public debt is now over 130% of GDP, second only in size to Greece, while the banking sector is loaded up with debt, representing about a quarter of the EU’s total banking debt.

These structural problems have a double-whammy impact on the economy – banks are weighed down with bad loans and so cannot afford to lend to new businesses while Italy’s high public debt means the country cannot afford higher long-term interest rates.

Stalemate again. Italy is the only eurozone country whose economy is smaller than it was before the financial crash in 2008, and whose millions of small businesses are crying out for a devaluation to make their exports more competitive.

Since the crash, it’s estimated that more than 1.5 million Italians have left the country. Living standards measured by real GDP per person were 5% lower in 2016 than in 2000. Compare that to Germany were living standards were 20% higher.

Unemployment among the young has soared to 32%, while across the population the rate is still well above the eurozone average at 11.8%. At the same time, the country has faced massive immigration – more than 600,000 people have entered the country over the last four years. That’s equal to a city the size of Palermo.

Whichever of Italy’s political parties emerge victorious on Sunday, you can be sure they be demanding some sort of treaty or deficit reform within the eurozone, as well as stricter controls on migration.

Brussels would be foolish to reject such overtures if it is to avoid further fractures in Italy. That’s also why the result in Berlin is so intertwined with Italy’s future – if Germany ’s SPD members reject the coalition, a new election or a minority government in Europe’s biggest economy is likely. Who knows what happens then.

But if Merkel wins their backing, then she and her EU allies must move fast to help the indebted south and consider whether to introduce eurobonds to support the debt of the ClubMed countries.

That seems only fair.