Italy is not out of the woods yet. Far from it. But the appointment by President Giorgio Napolitano on Wednesday of Enrico Letta to form a government has brought some measure of reassurance both to markets and the disgruntled public. Letta, the moderate deputy leader of the centre-left Democratic Party, now has to put together, and get parliamentary approval for, what is likely to be a fractious cross-party coalition involving his own party, the small Civic Choice group of former PM Mario Monti, and elements from Silvio Berlusconi's centre-right People of Liberty party.
The inevitability of such a cross-party alliance, loudly championed by Berlusconi, has been clear since the election gave comedian Beppe Grillo’s anti-politics Five Star Movement a blocking minority on any other political formation. But it represents a significant political victory for Berlusconi, now riding high again in the polls, and the complete eclipsing of the DP’s former leader Pier Luigi Bersani who had adamantly opposed coalition and is now a spent force. The DP is also deeply divided.
Letta’s challenge will be to hold together any alliance in the face of huge economic and political reform challenges. More than 31,000 companies, mostly small and medium firms, went bust in the first quarter of 2013, and unemployment is over 11 per cent, rising to 38 per cent among young people.
But Monti's unpopular reform drive looks set to see Italy reduce its deficit to 2.9 per cent of GDP this year, and Letta is counting on such signs of progress to help get the country's EU partners to ease off. He insists the EU is "too focused on austerity", echoing the president of the Commission, Jose Manuel Barroso, who this week said that while reining in budget deficits through austerity was "fundamentally right", it had "reached its limits". Italy yesterday also got similar backing from Pier Carlo Padoan, chief economist at the Organisation for Economic Cooperation and Development.
Italy’s EU partners would be foolish not to cut Letta some slack.