Italy succeeded in forming a new government in June 2018, but the political environment remains unstable. The fractious coalition is unlikely to survive its mandate, and growing anti-establishment sentiment raises the risk of political violence.
Political instability has risen following Italy’s general elections in March 2018, which saw anti-establishment parties receive a high share of the vote. After extensive negotiations, the right-wing League and Eurosceptic Five Star Movement formed a coalition government in June 2018. However, the coalition will be undermined by its wafer thin majority in parliament and its internal political divisions are likely to preclude coherent policymaking. As a result, the government is unlikely to remain in place until the end of its term in 2023.
Disillusionment with mainstream politics and anti-immigrant sentiment will increase the risk of civil unrest. Anti austerity demonstrations are likely to lose momentum as the new government has pledged to increase spending. However, as Italy has become a key transit point and place of settlement for migrants arriving in Europe, rival protests on immigration have become increasingly common. In February 2018, police clashed with protesters across a number of cities in Italy, including Milan and Rome. No property damage was reported but 7 people were injured during clashes in Bologna.
There have been no large-scale terrorist attacks in Italy since the 1980s. However, Islamic State has threatened to target the Vatican and police in Rome arrested a number of suspected Islamist extremists in March 2018. Left-wing anarchists may target businesses and public buildings with improvised explosive device (IED) attacks. Anarchist groups were suspected of an IED attack on a post office in Rome in May 2018, which caused no injuries but damaged a car.
The coalition has made a number of pledges that would weaken Italy’s fiscal position. In addition to lowering the retirement age, initial proposals include an outlay of EUR 50 billion on wage guarantees and a flat tax rate. These measures would place additional pressure on Italy’s finances, particularly as the public debt-to-GDP ratio exceeded 130% in 2017. However, considerable uncertainty remains
as to precisely which proposals will be introduced, as Finance Minister Giovanni Tria will not deliver his budget to the European Commission until September 2018.
Plans to increase government spending will support growth, but recent progress in reducing the budget deficit to 2.3% in 2017 is likely to be undone. Pension spending already equates to around 16% of Italy’s GDP, and proposals to increase this figure will further strain Italy’s finances. Political uncertainty is likely to weigh on business and consumer confidence, and real GDP is forecasted to grow by
1.5% in 2018 before slowing to 1.2% in 2019.
A tightening of monetary policy by the European Central Bank (ECB) would undermine Italy’s ability to maintain its debt repayments, but the ECB is likely to adopt a cautious approach. Relations between Italy’s new Eurosceptic government and the European Union are likely to remain poor, but members of the coalition have offered assurances that Italy’s membership of the euro is not under threat.
Italy’s new government poses a risk to the recovering construction sector, which is forecasted to grow by 2.23% year-on-year in 2018. The Five Star Movement has been a frequent critic of the environmental impact of large infrastructure projects, and the trans- Adriatic Pipeline and high-speed Turin-Lyon railway are likely to be reviewed. Italy’s new coalition is also likely to stall the gradual process of privatisation advanced by the previous administration, and the struggling Alitalia airline may be renationalised.
Although the Five Star Movement has pledged to combat corruption, the coalition is likely to focus on strengthening criminal sentences and delay reforms to the Italian judiciary. Italy’s inefficient legal system has contributed to elevated levels of corruption, and a number of high profile cases involving public contracts have been uncovered in recent years. In July 2017, over 40 politicians and officials were convicted following an investigation into ‘Mafia Capitale’, a bid-rigging scheme for public tenders.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Tanzania, Italy, Algeria and Chile all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
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For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email email@example.com
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