Coronavirus chaos is not what Italy needs

By Andrew Hammond

Facing its biggest crisis since World War II, Italy confirmed that it has become the first country other than China to have more than 2,000 deaths from the novel coronavirus.

While tackling the human cost of this health emergency is the foremost priority, the economic damage will also be massive, with the country already likely in its fourth recession in a decade.

Italy has already taken some of the most restrictive mobility measures in Europe since the 1940s with its citizens in effective lockdown conditions. Not only are people forbidden, in theory, from migrating across the country, shops (with the exception of supermarkets, food stores and pharmacies) are closed, while firms must close all their departments that are not essential to production.

Italy's bustling, world famous cities ― which have long been tourist magnets ― are becoming unrecognizable with the famous piazzas in Rome, Florence, and Venice empty. Rome's Catholic churches were ordered to close due to the pandemic, in a move potentially unprecedented in modern times.

The country's total number of confirmed cases surged to over 31,000 Monday with the death toll spiking to more than 2,500.

To put this in perspective, Italy has witnessed nearly 60 percent of the deaths recorded outside China since the epidemic first started spreading from Hubei Province. Italian hospitals have become increasingly overwhelmed by the crisis, with doctors forced to make life-or-death decisions about who gets access to intensive care.

This latest bout of instability, which Prime Minister Giuseppe Conte has called the country's “darkest hour,” is not just unsettling for Italians. There is also mounting concern about economic contagion within the eurozone in addition to the physical spread of the coronavirus.

New border checks have sprung up to stop the virus spreading across borders. Austria has ordered a halt to flights and trains from Italy, Slovenia has begun imposing controls at its border with the country and Switzerland said that the border remained open for commuters with work permits, but nine border crossings have been closed.

On the economic front, while Italy is less globally important than China, it is nonetheless a key G7 nation with the third-largest eurozone economy but may be becoming the eurozone's weakest link. It also has the second-biggest debt load in the single currency area at well over 100 percent of GDP, and its banking sector is under significant stress with large numbers of under-performing loans.

And this renewed economic angst comes in a wider context of public worry over corruption, the nation's migration crisis, and continuing fragility of the economy with double-digit unemployment and low growth. Indeed, only Greece has fared worse in the eurozone in the last two decades which has fueled the political success of anti-establishment politics in that country.

Reflecting the coronavirus challenge, the Italian government announced a 25-billion-euro stimulus package, a similar size to one the European Union announced for the entire 27-nation bloc. Rome also announced it “will use all available instruments on the EU front” to counter the challenge, including asking Brussels to allow the Italian government to increase its 2020 deficit spending to 20 billion euros from 12 billion euros.

Yet, early forecasts indicate that the economy could shrink dramatically not just in the first quarter, but also the second too, and declining business confidence was showcased in the worst single day loss ever March 12 (17 percent) on Milan's stock exchange as investors fretted over the cost of the coronavirus lockdown.

And with schools, universities, theaters, cinemas all closed, and the tourism industry locked down, the Italian government has decided to suspend mortgage payments for its quarantined citizens.

The economic chaos, which may mean that the banking system cannot stay solvent or liquid in the current national lockdown period, comes even before Italy's chronic political instability is factored in. The nation has seen over 60 postwar governments and it remains unclear whether the current coalition can last the course in current conditions.

The fear is not just that the current administration is unstable, but also that the government could collapse this year requiring fresh elections with the uncertainty this would bring and the prospect of further political paralysis.

In the event that new elections are held this year, a strong majority government is unlikely to emerge. In part, this is because of the introduction of a relatively new voting system that is two-thirds proportional representation, and one third first-past-the-post, to make it harder for any one single party to win an outright majority.

The threshold for any single party to have a working majority is now around 40 percent of the vote, which no party has come close to securing in recent years.

Taken overall, the latest bout of Italian instability could yet herald a critical turning point in the nation's postwar history that triggers a period of political and economic reform.

However, more likely is that the nation will only muddle through its biggest crisis since WWII with uncertain governance which precludes the stability and, ultimately, structural reforms in the 2020s that the country badly needs.

Andrew Hammond (andrewkorea@outlook.com) is an associate at LSE IDEAS at the London School of Economics.