Struggle for a new Italian government gains fresh momentum

„I would like to officially announce that, for me, all negotiations with the Lega [Nord] have now ended“. These words of the top candidate of the Five Star Movement (M5S), Di Maio, have injected fresh momentum into the deadlocked process of forming a new government in Italy. By verbally dismissing the right-wing populist Lega Nord, Di Maio is now expected to establish first contacts with the Social Democrats (PD). The latter have taken a complete U-Turn overnight and are now showing themselves open to talks. In the weeks prior to this, PD leader Martina had been propagating in mantra-like style that the party’s right place was among the opposition. Whether the negotiations to form a government prove successful is anyone’s guess. Given the major political and ideological differences separating the PD and M5S, the negotiations between the two camps are also destined to end in internal party disputes. There are fears that even more fragmentation will open up within the already divided Social Democrats, especially from the party’s left wing. Di Maio will also need to lobby strongly if he wants to convince his followers of the possibility of cooperating with what he had once denigrated as the „corrupt establishment“ without losing his credibility.

Capital markets on the other hand, which have only been marginally following the political stalemate in Italy in recent months, are now generally responding positively to the recent developments. Thanks to Di Maio’s show of rejection, the notion of an alliance between the right-wing and left-wing populists, in other words the absolute worst-case scenario from the market perspective, should have been shelved for the time being. But this does not mean that a PD-M5S alliance gives cause for genuine relief either, given fears that the structural reforms might be revoked and the austerity measures completely abandoned. After all, experience shows that in political constellations of this kind the only consent that can usually be reached is for a spending policy that is based on unhealthy fiscal terms but is at least able to calm the nerves of the respective political camps. Whether the recent handshake between the Social Democrats and the Five Star Movement really does mark a turning point in the struggle for a new Italian government will only become clear in the next few days and weeks. By the time Rome is able to actually present a functioning executive, a great deal of water will flow down the River Tiber.

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