crisis will not be resolved with a populist or anti-EU choice, Italia Viva says

LONDON – Italy’s latest political crisis will not lead to the installation of a populist or anti-EU government in Rome, a former minister told CNBC, as the country seeks a new government in the midst of a pandemic.

Italy is facing new political uncertainties after former Prime Minister Matteo Renzi withdrew his support for the current coalition government. His small party – Italia Viva – supported the Five Star Movement and the Democratic Party, two pro-EU parties, which have been in power since the summer of 2019.

However, differences on how to spend the next European recovery funds led Renzi to withdraw his support and cause the resignation of two Italia Viva ministers. This included Elena Bonetti, former Minister for Family and Equal Opportunities.

“What we don’t want to do is forge an alliance with a populist and anti-European right-wing government,” Bonetti told CNBC’s Joumanna Bercetche, when asked about possible future government formations.

The three-party alliance was vital in keeping anti-EU politicians away from the government during a previous political crisis in the summer of 2019. But support for anti-immigration and anti-EU parties is solid in Italy, where Lega and the Brothers from Italy are searching first and third, respectively at the moment.

“We believe that we must place Italy’s future prospects firmly within a European context. Therefore, there will be no populist or anti-European choices made,” said Bonetti.

In the past, financial markets have reacted to comments by anti-EU politicians in Italy who have suggested, for example, that the country would be better off outside the eurozone – the 19-member region in Europe where countries share the same currency.

The latest crisis led to an increase in the yield on the 10-year Italian benchmark title last week, but overall the impact on the market was somewhat subdued.

The European Central Bank is making massive purchases of government bonds due to the pandemic and the European Union is expected to launch an unprecedented level of fiscal stimulus across the region. Monetary and fiscal responses have reduced borrowing costs for European governments.

But the Italian political crisis comes at a particularly challenging time, with the number of Covid-19 infections showing no signs of slowing down and economic damage that could cause a 10% contraction of GDP (gross domestic product) in 2020.

Prime Minister Giuseppe Conte is expected to address the current crisis next week, but it remains unclear whether he will maintain his position and which parties can join together to form a new government.

“Conte could take some time to reflect on his decision as he tries to find lawmakers from other parties to fill the gap left by Renzi’s party,” Wolfango Piccoli, co-president of research firm Teneo, said in a note, suggesting that the crisis current can drag on for some time.

There are three main options for resolving the impasse: A new coalition government, perhaps with a different prime minister; a government formed mainly by people without political affiliation, but with essential technical knowledge; or early elections, which the governing parties wish to avoid.

“We continue to think that Conte is likely to remain in charge,” Federico Santi, a senior analyst at consultancy Eurasia Group, said in a note, giving this scenario a 40% probability.

He also said that “early elections remain unlikely for now”, but if they happen “the governing parties are likely to suffer serious setbacks in the case of elections, which is likely to pave the way for a right-wing Eurosceptic government”.