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Italian Populists Are Backing Away From Euro Exit

Niblett, Page on the Importance of Elections in Italy

Arrivederci euro? Italy’s populist parties have been flirting with the idea of dropping the single currency ahead of a general election on March 4. The euro region’s third-biggest economy abandoning the currency could spark a doomsday scenario complete with capital flight, banking crises and havoc in public finances. But the recent rhetoric falls short of indicating that the the populists are prepared to go through with it.

1. What is the fuss about?

The anti-establishment Five Star Movement, which is leading in the polls, has long promised a consultative referendum on whether to abandon the euro. Hedge funds and other investors have been quizzing lawmakers in Rome about the risk to Italian assets.

2. Does Five Star really want to drop the euro?

Depends on whom you ask. Luigi Di Maio, Five Star’s candidate for the premiership, has blown hot and cold on this in recent months. On Sept. 4, he told a business forum that a referendum would be “a last resort” to force reforms of the European Union. On Dec. 18, he told La7 television that, if such a referendum were held, he would vote to drop the euro, “because it would mean that Europe has not listened to us.” On Jan. 9, he told RAI television: “I don’t think this is the time for exit.”

3. Why the flip-flopping?

Di Maio is trying to broaden his support enough to win power, without alienating the hardliners who’ve driven the movement thus far. He "has to reconcile the populist origins of Five Star with the aim of showing it is fit for government,” said Fabio Bordignon, a political sciences professor at the University of Urbino and a specialist on the movement. “Five Star spans the left and the right of the political spectrum, so I expect the ambiguity to last until election day.”

4. How easily could Five Star take Italy out of the euro?

It would be very difficult. Polls shows that Five Star, even if successful on March 4, will be a long way from an outright majority, and Di Maio has ruled out forming a coalition. So for starters, he’d need to find a way out of that bind. Moreover, the Italian Constitution bans the abrogation of international treaties via a popular vote. Clearing away that obstacle would require a two-thirds majority in parliament. Or the government could take the highly unlikely step of ditching the euro on its own.

5. What are other parties saying?

The ruling Democratic Party of Premier Paolo Gentiloni is a staunch supporter of euro membership. But the anti-migrant Northern League, part of a center-right alliance with former premier Silvio Berlusconi that is projected to be the biggest bloc after the election, is blowing cold on the euro as well. Its leader, Matteo Salvini, has branded the common currency “a crime against humanity” in the past, and he said on Jan. 11 that he’s “keeping open the option of quitting the euro.” Berlusconi, during previous campaigns, has suggested bringing the lira back into circulation as a parallel currency to the euro. But he tweeted this month that Salvini knows quitting the euro is impossible and had given up on the idea. 

6. What do Italians want?

According to a Eurobarometer survey by the European Commission in November, 59 percent of Italians -- founding members of the European Union in 1957 -- support economic and monetary union with the euro, with 30 percent against it. Across the euro area, close to three-quarters of respondents are for the euro -- the highest score since spring 2004.

7. Why should investors watch this election?

Italy remains the sick man of Europe, and a divided parliament may struggle to address its economic problems. “What’s a concern is what will happen to the economy after the election,” said Erik Jones, professor of international political economy at the Johns Hopkins University in Bologna. “If we get a grand coalition, it won’t be able to do very much, and the EU may start to put incredible pressure on Italy to clean up its banks and pay down its debt.”

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