Global Investing Hot Spots

Not all Europeans hate Trump's tariff policy — Italy's far-right PM candidate loves it

By Nasos Koukakis, special to CNBC
Key Points
  • Italy will have a parliamentary election on March 4 and a populist movement is growing.
  • Former Prime Minister Berlusconi's party is vying with Northern League leader Matteo Salvini for leadership of the center-right.
  • Issues over immigration and the economy are dominating campaigns.
  • Salvini vows to impose tariffs like Trump to protect Italian manufacturers if elected prime minister.
Italian Northern League leader Matteo Salvini speaks during a political rally in Milan, Italy February 24, 2018.
Tony Gentile | Reuters

Donald Trump's new tariffs on imported steel and aluminium did not receive a negative comment from all Europeans. "Eurosceptic" politicians welcomed it. Among them, Matteo Salvini, the leader of the Italian far-right Northern League, who has openly embraced the U.S. president's push for more tariffs.

Salvini, 44, took over the party in 2013 from its founder, Umberto Bossi. He has been an omnipresent media figure who has used the country's growing economic discontent, and wariness about immigrants, as a vehicle to reach voters. The PM candidate is in favor of Italy's exit from the euro which he has called a "Germany currency" that has damaged Italy's economy.

With Italian elections on March 4, Salvini made a pledge: "If Italians will choose me as prime minister I will [impose tariffs] like Trump. I will defend Italian workers and entrepreneurs even if it means putting up tariffs to protect the 'made in Italy' brand."

Salvini's party has been gaining ground ahead of Sunday's elections in Italy.

Austerity policies and unpopular reforms have empowered the populist parties in Italy as they have in Greece and elsewhere in Europe. The anti-establishment Five Star Movement, the far-right Northern League and Brothers of Italy, another far-right eurosceptic party, have accumulated great power over the pro-European forces expressed by the ruling Democrats and Silvio's Berlusconi Forza Italia party.

Italy's weak economic growth which lags the rest of the euro area has given these populists ammunition. Currently, Italy has 1.5 percent GDP growth versus 2.4 percent for the rest of the eurozone. The eurosceptic Italians are accusing globalization for the economic weakening of Italy and this narrative has become popular with many in the electorate. They point to the fact that 20 percent of Italy's manufacturing industry, which was the largest in Europe after Germany's prior to the adoption of the euro in 2002, has been destroyed, and about 40,000 companies have disappeared.

Adopting political positions against globalization, similar to President Trump, they preach that the economic backwardness of Italy has its roots in the immensely degraded political culture of the country's elite, which, in the last few decades, has negotiated and signed countless international agreements and treaties without ever considering the real economic interest of the country and without any meaningful planning of the nation's future.

The far-right eurosceptic parties argue that previous governments never recognized that indiscriminate opening to Asia's light industrial products would destroy Italy's once leading industries in the same sectors. They also accuse previous governments for signing the euro treaties without taking into account the implications that handing monetary policy over to the ECB would have on Italy's national sovereignty.

Italian election: Structural reforms unlikely whatever the outcome, analyst says
Italian election: Structural reforms unlikely whatever the outcome, analyst says

"Nearly a decade after the global financial crisis, real disposable incomes per capita in Italy are still below pre-euro accession levels and have fallen behind other euro area countries.This reflects the persistent under-performance of Italy's economy, particularly productivity," Emilios Avgouleas, a professor of banking law and finance at the University of Edinburgh, told CNBC.

The eurosceptic parties rhetoric resembles President Trump's on many other issues, including immigration and protecting the country's borders. They blame the previous governments for signing the Dublin Regulation — a European Union law that determines the EU Member State responsible to examine an application for asylum seekers seeking international protection under the Geneva Convention — knowing perfectly well that Italy is not even remotely able to patrol and protect its borders.

In this context, one possible result in the Sunday elections could be an outright victory for a center-right coalition that not only includes Berlusconi's party but also the Northern League and Brothers of Italy, with the strongest of the three choosing the next prime minister. In an effort to control the far-right forces, European Parliament President Antonio Tajani said on Thursday he would stand as candidate for prime minister for Berlusconi's Forza Italia in the March 4 vote.

The most desirable outcome for markets and Europe would be a grand coalition, or a national unity government, of centrist political forces including both the Democratic party and Berlusconi's Forza Italia party. Although the anti-establishment Five Star Movement could emerge as the biggest party under the present circumstances, it could prove difficult to find enough allies to form a government.

Grim economic realities

The rise of nationalism in Italy is not surprising. For years Italians have suffered through economic crisis and stagnation. Unemployment remains at a high of 10.8 percent and wage growth is below 1 percent. Its high public debt, 132 percent of GDP, is the second-highest in the 19-country eurozone after Greece.

No doubt the outcome of the election will determine how political tensions with the EU will unfold. A drama similar to the one that happened in Greece after left-wing Syriza leader Alexis Tsipras won the prime minister seat could happen.

Economists hope that politics will not stall the Italian economy's road to recovery. Last year, the country's gross domestic product grew at a rate of 1.5 percent, its fastest pace since 2010, and is expected to maintain that momentum this year, according to the IMF. Italian shares have been among the best performers in Europe. The country's 10-year bond yield, a key measure of its borrowing costs and investor confidence in its fiscal sustainability, has remained low, hovering around 2 percent.

But ahead of the election some unease has crept into markets, leading to underperformance in the bond market. Economists worry how the populist agenda could affect Italy's economic growth prospects in the future.

Analysts' have warned that a possible predominance of eurosceptics could lead Italy's 10-year yield premium over German bunds from 140 basis points today to 260 basis points, a level not seen since 2013. This would be harmful for Italy. According to the IMF, for every 100 basis points increase in Italian spreads, the higher borrowing costs are passed on to the real economy, depressing growth by 0.4 percentage points.

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