Italy's institutional crisis, the Euro, and the Left

Daniele Girardi

(May 29, 2018)

Italy is experiencing a serious institutional crisis. On May 27th Italy's President Mattarella, in an historically unprecedented move, vetoed the formation of a 'populist' government which had the support of an absolute parliamentary majority, composed of the Five Star Movement (M5S) and the right-wing Lega. The veto concerned, specifically, the coalition's choice for Finance Minister, 81-years old Paolo Savona, an economist and experienced public official.

Those on the (Italian and international) Left who are either applauding the blocking of what would arguably have been a reactionary Government or engaging in endless discussions on whether Mattarella abused his powers or just enforced Italy's glorious Constitution, are mistaken and fail to appreciate the deep meaning of the Italian institutional crisis. Unfortunately, this includes Pietro Grasso, the leader of the only Left-wing party represented in the Italian Parliament ('Free and Equals', LeU), who expressed his support for Mattarella's move.[1]


Italy's institutional crisis

President Mattarella's veto is motivated by the suspicion that Paolo Savona, if appointed Finance Minister, may have attempted to bring the country out of the Eurozone. The suspicion is based on a reading of some of Savona's recent writings. Savona has denied this intention. However, he has long argued that Italy, while demanding a change in German-dominated and austerity-based Eurozone policies, should be equipped with a plan B in case an exit is required. The preparation of a viable plan B, according to him, would strengthen Italy's bargaining position and make his favored scenario - Italy remaining in the Eurozone under more favorable conditions - more likely. This is a reasonable position.

Mattarella decided he had a right and duty to veto Savona's nomination, and thus block the formation of the M5S-Lega government, in order to avoid the possibility of an exit from the Eurozone. His main concern was to reassure financial markets, which were showing some (not too dramatic, actually) sign of turmoil at the prospect of a M5S-Lega government, and avoid a possible plunge in asset values. Few hours later, with this concern in mind, he gave a former IMF official, Carlo Cottarelli, a mandate to try to form a 'neutral' technocratic government.

Even by its own standards, Mattarella's autocratic move was ill conceived and, unsurprisingly, is already backfiring at the time of writing. Turmoil in stock and bond markets, which had been limited until his surprise move, actually increased after Cottarelli's appointment. The problem, from the point of view of financial investors, is that Mattarella's veto made fresh elections, probably before the end of the year, quite likely. These elections may turn into a referendum against the Euro, and would likely provide euro-skeptic M5S and Lega with an even bigger parliamentary majority, as many Italians are rightly outraged by Mattarella's veto.[2]

Its failure to reach its own goals, however, is not the main reason to reject Mattarella's move. What should be strongly rejected is the principle that appeasing financial investors, defending international financial arrangements and, ultimately, preserving the value of wealth, should prevail over citizens' political right to democratically elect their own government.


A disaster made in the Eurozone

While allowed by some ambiguity on this point in Italy's Constitution and the irresponsible behavior of key political actors - especially those in Mattarella's Democratic Party who must have encouraged his decision - this disaster is made in the Eurozone. The Eurozone's institutional architecture is so utterly dysfunctional, and so detrimental to Italy's economy, that Euro-skeptic parties are gaining a considerable and growing electoral premium. A system that fosters mass unemployment in peripheral countries like Italy (not to mention Greece, of course) can hardly be politically sustainable in the long-run.

To be sure, the proximate cause of Italy's growing socioeconomic crisis is austerity and neoliberal reform more than the Euro itself. But austerity and neoliberal reforms are deeply engrained in the Eurozone institutional architecture. In the absence of exchange rate flexibility or automatic fiscal transfers, the whole burden of adjusting to trade imbalances is placed on peripheral countries. The absurd and draconian fiscal rules of the Maastricht Treaty (which are applied with a severity which is inversely proportional to a Member State's political weight) ban any attempt to support employment through Keynesian policies. A fully fledged fiscal union, which would probably make the Eurozone more sustainable for peripheral countries like Italy, is politically unfeasible because of Germany's strong opposition, and will remain so for many years to come. Even the partial solution of fostering higher wage and price growth in the core countries (mainly Germany), to ease the burden on peripheral countries, has no chance of being implemented anytime soon.[3]

As a result of this economic and political unsustainability, in Italy the point seems to have been reached, in which only what is effectively a suspension of democracy can ensure the survival of the Euro. Saving the Euro by suspending democracy is exactly what President Mattarella has (perhaps clumsily) attempted to do.


Democracy and capitalism: property rights vs. political rights

The speech that President Mattarella gave to explain his veto to a 'populist' M5S-Lega government is very telling regarding his motivations:


 "The designation of a Minister of the Economy always constitutes an immediate message of confidence or alarm for economic and financial players. (...) Uncertainty over our position on the euro has raised alarm among investors and savers, Italian and foreign, who have invested in our Government bonds and in our companies. (...) The losses on the stock exchange, day after day, burn the resources and savings of our companies and of those who have invested in them. And they configure a tangible risk for the savings of our citizens and for Italian families. (...).It is my duty, in fulfilling the task of appointing the ministers, which I am entrusted by the Constitution, to pay great care in protecting the savings of Italian citizens."[4]


Naturally, by 'savings' President Mattarella meant accumulated savings, i.e. wealth. It is primarily to preserve the value of wealth that Mattarella suspended the political right of Italian citizens to be ruled by a democratically elected government.

It is true, of course, that a Eurozone break-up and the ensuing financial turmoil would probably have disastrous short-term consequences that would hurt not only capital holders, but also wage earners and lower-income classes in general, especially if poorly managed. Indeed, one of the founding principles of the European Monetary Union is to subject member countries to the 'discipline' of markets, i.e. to discipline them into putting the interest of capital above all other considerations.

The general fact that the reaction of capital holders to political developments limits the range of policy options that are feasible in a capitalist economy is, of course, not just an aberration caused by the Italian and European situation. These constraints are, in some form or another, always there in liberal democracies. They have become much stronger and more binding almost everywhere, after the demise of the post-war Keynesian arrangement and the widespread liberalization of trade and capital markets. They are one of the manifestations of a structurally contradictory relation between property rights and citizens' political rights - contrary to the rosy view of those who see capitalism and democracy as perfect complements. In short, a contradictory relation between capitalism and democracy is a structural feature of modern liberal democracies.[5]

Consistently, sensitivity of asset prices to political developments is not a novel feature of Italy's recent events. What markets usually 'punish' is actually left-wing electoral victories, especially when the Left proposes radical economic reforms. To cite the most dramatic cases, Allende's electoral victory in 1970 Chile caused the stock market value of Chilean firms to fall by one half; Mitterrand's victory in France in 1981 was followed by a 30% plunge in the French stock market and depressed business investment. My own research on this topic, exploiting close elections to identify causal effects, suggests that, on average across many worldwide national elections, a center-left electoral victory causes stock prices to fall by around 10%.

The point is that, as the Italian political crisis demonstrates, the Eurozone's institutional architecture greatly intensifies the extent of this conflict between economic and democratic institutions, and shifts the balance decidedly against democratic rights. The Eurozone institutional architecture forces on member countries an extreme version of 'free market capitalism' that severely hampers citizens' political rights.


The Left and the Euro

If this is how the Italian institutional crisis should be interpreted, supporting Mattarella's veto against the M5S-Lega coalition is an extraordinarily myopic stance for those on the Left, even admitting the reactionary nature of that coalition.

While rejecting the xenophobic and regressive aspects of the M5S-Lega political platform, those on the Left should stand for democracy and against the unacceptably tight constraints that the Eurozone is imposing on it. Mattarella's autocratic move, and analogous moves that may happen in the future and in other parts of Europe, should be rejected. The Italian 'populist' coalition won a majority of parliamentary seats. Its components, M5S and Lega have been able to gain most of the votes in the last general election, including a large majority among Italy's lower-income classes. They have the right to govern Italy and to choose their stance on European issues. The Left should, of course, attempt to regain the support of the working class, challenging this coalition politically. But we should reject the principle that they are disqualified to govern because 'economically irresponsible': the same disqualification would apply to any progressive government in the Eurozone's periphery.

Most importantly, these events highlight the need for the Italian and European Left to adopt a more realistic stance on the Eurozone issue. While I'm writing, the Italian left-wing 'Free and Equal' (LeU) party is issuing appeals to the centrist Democratic Party to form a 'pro-Euro democratic front' against 'populist' parties. The position of an important part of the Italian and European Left on the Eurozone is indeed delusional and counterproductive. It will become even more so in this phase, in which the latent conflict between democracy and the monetary union is becoming evident to all those who don't close their eyes on reality.

The growing consensus enjoyed by Lega, especially among the working class, is partly due to its more realistic, and rightly skeptic, position on the Eurozone. Instead, most on the political Left refuse to abandon the naive dream of a (politically unfeasible) grand progressive reform of the Eurozone, while at the same time considering the monetary union untouchable.

In this context, economists who are rightly critical of the monetary union and understood its anti-democratic bias have not received the attention they would have deserved on the Italian Left. Some of them claim to have been ostracized. One of the most vocal and popular of them, Alberto Bagnai, eventually decided to search for more receptive ears on the right. He successfully ran for a parliamentary seat with Lega in the 2018 election, and is now one of the main economic consultants of its leader Salvini. This is too bad. As the Greek experience teaches us, if a democratic socialist left ever gains political momentum in Italy, it will necessarily face a clash with the eurozone and its institutional framework, which is deeply biased against labor and basically rules out any bold progressive agenda. A more realistic view of the Eurozone is necessary both to regain political consensus, and to prepare for that clash.


[1] While other (although not all) LeU leaders expressed a similar position, the majority of the party's (small) electoral base probably disagrees. The smaller and more radical 'Power to the People' (PaP), which does not hold any Parliamentary seat, condemned Mattarella's choice.

[2] At the time of writing, the situation is still unsettled. It appears highly unlikely that Cottarelli's government can reach a parliamentary majority. At the same time, the M5S is trying to revive the possibility of a M5S-Lega government, proposing a different candidate for Finance Minister.

[3] On this, see Sergio Cesaratto (2017), "Alternative interpretations of a stateless currency crisis", Cambridge Journal of Economics,

[4] Here is the official English translation of Mattarella's whole speech

[5] The most compelling exposition of this idea can be found in Samuel Bowles and Herbert Gintis' 1987 book “Democracy and Capitalism”.