Paola Subacchi
Research Director, International Economics

Italy's general election on 24-25 February holds the key to the country’s institutional renewal and economic recovery. It is also critical to the future of Europe's monetary union.  

At around €2 trillion, Italy’s public debt is the highest in the eurozone – although it is second to Greece as a percentage of GDP. Its economy has been performing poorly for a number of years and  is in its fourth recession since 2001. The IMF expects the Italian economy to shrink by one per cent this year, and GDP has dropped by almost eight per cent from its pre-crisis level.

Commentators speculate whether an electoral outcome that produces no clear majority will push the country back into political chaos and rekindle the eurozone crisis. Of less concern is whether the discredited Silvio Berlusconi will emerge to lead the country for the fourth time in 20 years. Even if he has been dominating the media throughout the campaign and is expected to get around 20 per cent of the votes, the likelihood of another Berlusconi government is slim.

Voters are tired of the country’s protracted economic malaise and disillusioned with the 'austerity narrative'. Unemployment, at almost 12 per cent, with youth unemployment at 35 per cent, are at record highs. And the tax burden now stands at almost 43 per cent of GDP. It is therefore not surprising that political parties campaigning on an anti-austerity, anti-euro agenda are expected to receive about 40 per cent of the vote.

The next government will face the huge task of convincing Germany and international investors that Italy is a reliable partner. For this it will need to keep up with the programme of fiscal adjustment that was devised to stabilize the debt-to-GDP ratio this year and put it on a downward path over the medium term. This is essential in order to avoid a vicious circle of higher interest rates and market instability that would further undermine growth. A confidence crisis in Italy would also seriously impact the stability of the eurozone and further erode support for the euro.

At the same time the next government will have to convey to the public that the country’s economy will not pick up quickly and that more tough measures may need to be introduced. Even if fiscal consolidation seems to run against the goal of achieving economic growth, the temptation of turning back the clock and disavowing existing commitments should be avoided. Instead the next government will have to take a strategic view over a five-year mandate – there will no longer be a technocratic government with a fixed-term of 12-13 months and an emergency agenda. The government will have to put together a plan with credible and manageable targets to support growth throughout its mandate. Fiscal targets need to be consistent with growth targets, and with a strategic view of the country’s future trends.

A solid working majority in Italy's parliament is required to lead the country through the present difficult phase and restore international credibility. It is in the interest of everybody that Italy succeeds in getting a government to take it out the current deadlock. The international community should keep a close eye on Italy and continue to put pressure on its government – whoever forms it – to ensure that commitments are held and reforms are delivered.

Paola Subacchi talks to the Financial Times about Italy's election