Italy's President Calls National Elections as Country Grapples With Economic Pain

Italy's President Sergio Mattarella dissolved parliament Thursday and called elections for early March, a vote that will highlight the economic and political problems still stalking Europe and the country's role as the weakest flank in the currency union.

The vote--the latest in a series of momentous elections in Europe--will be in line with the overwhelming trends of 2017, featuring a fractured electorate, continued pressure from populist movements and predictions of a struggle to form a cohesive government.

But for many European leaders, Italy remains the most worrisome spot in the eurozone, given the huge size of its public sector debt, its weak banks and poor competitiveness.

The elections, set for March 4, aren't likely to put those concerns to rest, as the center-left tries to fend off a populist upstart and the return of Silvio Berlusconi, the 81-year-old whose political rebirth is further shaking up politics. The 5 Star Movement--the anti-establishment group that stormed Italian politics during the crisis on popular anger with legacy politicians--could win about 30% of the vote.

Most expect a hung parliament and a protracted period of political instability in the eurozone's third-largest economy, which has been hamstrung by structural problems and bureaucracy that have helped keep its economic growth lagging behind the rest of the eurozone.

Europe is enjoying its best economic momentum in years, a rebound that could muffle concerns over the Italian vote. Italy's economy has been buoyed by the robust expansion elsewhere in Europe and by several years of ultra-loose monetary policy, combined with pent-up demand at home after the country's deepest and longest downturn since the war.

Italians are splurging on new cars, buying about two million new ones this year, with more families buying second cars, according to Promotor, an Italian research group. Italy's banks--a source of Europe-wide concern last year-- are slowly putting their house in order, having shed EUR60 billion in bad loans this year.

But, though the economy will likely have expanded 1.5% in 2017, its fastest pace in six years, it marks the slowest growth in Europe this year, along with the U.K., according to EU forecasts. It is expanding half as fast as countries such as Spain, which has bounced back strongly. Deutsche Bank expects Italian growth to slow to 1.4% in 2018 and 1% the year after.

Its economy is 6% smaller than at the start of 2008, making it the only G-7 economy not to have returned to its pre-crisis size.

The governments of Prime Minister Paolo Gentiloni and his predecessor Matteo Renzi have undertaken some key reforms, notably in loosening labor market rules and in shoring up the bank's fragile banking sector. "The economy that the next parliament will inherit will be far better than the one the current legislature did," said Italian Economy Minister Pier Carlo Padoan at a recent conference.

But business and political leaders say Italy has failed to exploit the crisis to address chronic weaknesses.

In a speech a decade ago as head of Italy's industry association, Luca di Montezemolo, former chairman of Fiat SpA, listed 10 urgent reforms Italian businesses wanted from the government, including a leaner bureaucracy and lower taxes. "I could give that same speech today," he said in an interview.

Several years ago, Luciana Ciceri, a 50-year-old owner of a family business outside Milan that makes plastic molds, seized on government incentives aimed at encouraging fresh investment. She decided to expand into the production of plastic filaments used for 3-D printing. That new line has since helped offset a 15% drop in sales of her legacy older products. Overall sales have also picked up noticeably this year.

But when the crisis forced Ms. Ciceri to cut costs and move her business to a smaller warehouse, the red tape was such that she had to pay a consultant to deal with it. She has also been wrestling with Italy's notoriously slow justice system. She spent five years chasing one client who failed to pay, but has yet to recoup the sum.

"These are enormous problems for anyone who wants to invest in this country," says Ms. Ciceri.

Such structural impediments mean Italy probably can't grow any faster than its current rate, say economists. The International Monetary Fund doesn't expect per capita income in Italy to return to pre-crisis levels until the mid-2020s.

The downturn has left deep scars in Italy's social fabric. More than 4.7 million Italians live in absolute poverty, nearly double the number a decade ago, according to Italian statistical agency Istat.

With youth unemployment at 35%, an entire generation of young people remains jobless or subsists on poorly paid, short-term contracts. Even as the brain drain that has afflicted much of southern Europe begins to ebb, thousands of Italian university graduates continue to emigrate each year.

"The current level of growth is too low to solve people's problems," says Enrico Giovannini, economist and former labor minister.

Next year's elections are unlikely to provide Italy with the fresh start the country needs. Three main groups are jockeying for votes--but none is expected to win.

Mr. Berlusconi, the three-time premier who resigned in 2011 in disgrace amid judicial scandals and economic turmoil, has seen a surprising renaissance this year. The billionaire, who has revived old promises of tax cuts and more generous pensions, headlines a conservative coalition that enjoys about 37% of voting intentions.

Trailing behind the conservative coalition and the 5 Star Movement is the ruling Democratic Party, whose support has slumped amid voter fatigue.

With no group likely to reach a majority, a hung parliament is highly probable. Lorenzo Codogno, former director general of the Italian Treasury Ministry, assigns a 75% probability to such an outcome.

In response, Mr. Mattarella could ask parties to attempt to form a grand, cross-party coalition that would tackle certain reforms and could have a limited life span--an outcome favored by some investors hoping for a technocrat government. If that fails, he could call fresh elections.

Write to Deborah Ball at and Giovanni Legorano at

(END) Dow Jones Newswires

December 28, 2017 14:00 ET (19:00 GMT)