Don’t Fear Italexit. It Won’t Happen.

Rome’s next government has plenty of challenges. Leaving the euro isn’t one of them.

Maria Tadeo

25 Jul 2022, 05:13 PM IST

<div class="paragraphs"><p>ROME, ITALY - MAY 21: Italian and EU flags are seen outdoor the Villa Doria Pamphilj during the welcome ceremony before the Global Health Summit, on May 21, 2021 in Rome, Italy. Photographer: Antonio Masiello/Getty Images Europe</p></div>

ROME, ITALY - MAY 21: Italian and EU flags are seen outdoor the Villa Doria Pamphilj during the welcome ceremony before the Global Health Summit, on May 21, 2021 in Rome, Italy. Photographer: Antonio Masiello/Getty Images Europe

(Bloomberg Opinion) -- There's a lot of things to worry about in the wake of another government collapse in Rome — but, please, let's expunge Italexit from the list for good.

The concept is a familiar one for investors: At a moment of political stress, Italy could crash out of the euro and return to the old lira as a result of bad government decisions, be it by design or accident. If Italexit were to manifest — or even approach reality — it would trigger an unprecedented crisis for both the single currency and the Italian economy. Except it won't happen.

The term is generally misunderstood and grossly exaggerated by international commentators who often ignore how the Italian political and legal systems work. Not to mention the fact that the idea itself has disappeared almost entirely from the national debate. And the business community detests it. It is clear to everyone that to benefit from European perks, you have to drop the Italexit talk and play ball.

In fact, a lot of the concerns I often hear when debating Italy outside of Italian circles fail to incorporate the reconfiguration the country has gone through in the past two years, both at home and in Brussels. The transition to more moderate positions on Europe — and therefore Italy's place within the European Union — began in 2019 under the second government of Giuseppe Conte, the leader of the Five Star movement, who pulled a volte-face during his time in office.

The new approach was cemented under Mario Draghi's government — the one that collapsed last week. In his first speech before the Senate in 2021, the former central banker made Europe a pillar of his government action as well as a key to enter his coalition, which every party except for Brothers of Italy joined. At the time, Draghi told lawmakers: "Without Italy, there is no Europe, but outside of Europe, there is even less Italy."

Of course, the counter argument is that Italian politics is volatile. Investors got burned in 2018 and have reason to worry. Before Italy doubled down on Europe under Draghi, the populist coalition led by the League and the Five Star Movement openly flirted with euroskeptic arguments. It tried to appoint a well-known critic of the euro as finance minister and even toyed with the idea of issuing Treasury-backed mini-bills as an alternative means of payment, an idea that was quickly shot down by Draghi, then head of the European Central Bank.

Still, who is to say — and better yet — guarantee that won't happen again? Here, I like to point to three factors.

For starters, the parties themselves. If you look at polls right now, the next coalition will likely be a right-wing coalition led by Brothers of Italy, the League and Silvio Berlusconi's Forza Italia. The three parties argue they’ll reinvigorate the economy, but the stresses of Italexit would certainly frustrate those hopes.

The Italian right likes to present itself as more effective in economic management, a friend of lower taxes and everything Made in Italy. Now, when it comes Giorgia Meloni, the head of Brothers of Italy, and likely winner of this whole mess, one thing to remember is that she is a force of opposition. If Draghi says the euro is irreversible, she is bound to say the opposite, not so much for ideological reasons, but simply for tactics. And it has served her well so far. I'm just not convinced it will be as effective when the fiery politics of confrontation gives way to the sobriety of governing.

As for the League, which created much of the trouble after the 2018 election, regardless of talk, it has grown close to the institutions and has strong ties to industrialists, who don’t want to hear about Italexit. In fact, they want the next government to follow the path laid out by Draghi, knowing full well it is the best way to benefit from European cash.

When it comes to Forza Italia, euroskepticism was never really a thing for Berlusconi's party. The group belongs to the European People's Party in Brussels, the same affiliation that unites the mainstream center-right across Europe and also happens to be the political home the current head of the European Commission, Ursula von der Leyen.

Finally, the Italian political system has a fascinating ability to cut losses and reduce damage if need be. President Sergio Mattarella, a largely symbolic figure on paper, has shown strong political instincts during each crisis, signaling that there are limits once you get to government. Like the time he rejected a draft coalition government deemed too euroskeptic in the aftermath of the 2018 vote.

Now, I'm not saying everything is rosy. It’s not. Draghi's fall takes Italy back to its old ways: messy, unpredictable and volatile. The collapse of the government, in the midst of a European war all while facing a winter of discontent, proves just how self-absorbed the Italian political class is. With political turbulence, comes market jitters, some of which are already playing out on the Italian bond market — and investors are right to be concerned about the implications for the country's long-term debt management. But they shouldn’t fret about the prospects of Italexit creeping back.

In fact, the challenges facing the next government are so big, their hands are full — and tied. And considering the level of bickering we’re about to see as the campaign gets underway, they probably could not even agree on how to exit even if they wanted to.