The unknown academic Giuseppe Conte pitched himself to the Italian people as their defence lawyer on Wednesday.
“I will be the defence lawyer for the Italian people,” Conte said.
The statement begs the question who is the prosecution, although the European Commission made clear that Rome must stick to fiscal consolidation measures. Despite a confrontational programme signed by the parties supporting the incoming administration, on Wednesday, Conte acknowledged Italy’s “international obligations,” a reference to the Italian public debt. At 130% debt-to-GDP ratio, Italy’s sovereign debt is second only to the Greek and the biggest in Europe in absolute terms.
The President Sergio Mattarella did not veto Conte’s nomination and gave him the mandate to form a government; procedurally, he must now name his cabinet nominees and the new government will need to receive a confidence vote. The question now is whether this government is on a collision course with Brussels.
A government of change
Conte represents not another Italian government, but a different kind of government. Being an unelected prime minister with no political weight of his own, the 54-year old Conte addressed the executives of the two parties lending his emerging cabinet parliamentary support, making frequent references to the brand-name “a government of change.”
This is the first Italian administration supported by the Five Star Movement (MS5), although the far-right Lega has governing experience. But, unelected prime ministers are not a rarity in Italian coalition governments. Conte is the sixth of his kind, although his technocratic outlook was undermined by his embellishment of the CV with academic credentials he does not have.
The new government has vowed to challenge the EU’s fiscal compact, undermine sanctions against Russia and amend the Dublin II migration management regime. Economic promises are particularly concerning, as the incoming administration has vowed to introduce a minimum income policy, revoke unpopular pension reform legislation and boost public investment.
Expecting a clash with Brussels
On the day of Conte’s appointment, the European Commission agreed not to initiate infringement proceedings for the violation of budget rules. However, the Commission did note that Italy’s 2018 proposed budget does not go far enough in meeting fiscal targets. The European Commission Vice-President Valdis Dobrovskis subsequently invited the Italian government to take fiscal consolidation measures to the tune of 0,6% of GDP, to ensure that debt-to-GDP ratio remains on a downward trajectory.
“We recommend that Italy continues to reduce its deficit and debt and, for 2019, we recommend a structural adjustment of 0.6%,” Dobrovskis said.
The incoming government may be reluctant to oblige. In his inaugural address, Conte recalled Italy’s “systemic significance,” cautioned about “potential spillovers to the rest of the Euro area” and made reference “ongoing negotiations over the European budget” as well as the banking union. He vowed to conduct these negotiations by pursuing “national interests.”
Markets are now watching whether the name of Paolo Savona will be confirmed as Italy’s economy minister. The 81-year old former President of the Italian lobby Confindustria has called the Euro a “historic mistake” and has in the past advocated for a “Plan B,” which would see Italy restore a national currency if necessary.
Markets continue to exert pressure on Italy for compliance; Italian bonds yields surged to a 14-month high on Wednesday. As the Eurozone’s third biggest economy, Italy presents a systemic risk that is also affecting the Euro’s exchange rate.