(Bloomberg) -- Senior Italian officials are worried that the grandstanding of Giorgia Meloni’s most dangerous ally could upset the delicate balance in the governing coalition, jeopardizing her commitment to spending restraint and the stability of the administration.
Despite her partners’ sympathies for Russia and impatience with European Union deficit rules, the far-right prime minister has so far taken a more moderate stance on the issues that matter most to investors, containing spending to avert a selloff in Italian debt and, on the whole, maintaining good relations with Italy’s allies. As a result, the spread between Italian and German 10-year bond yields, a key gauge of political risk, has narrowed by almost 50 basis points since her election victory in September.
But 45-year-old Meloni’s behavior has become more erratic in recent weeks as she struggled to maintain the upper hand in a long running struggle with her deputy prime minister and populist rival, Matteo Salvini. She even stumbled into a dispute with France, Italy’s most important ally, after Salvini’s maneuvers threw her off balance.
Italy has been a crucial part of the U.S.-led support for Ukraine since the Russian invasion in February, when Mario Draghi’s presence offered reassurance of stability. But that international alliance is facing pressures on multiple fronts. Blackouts across Ukraine are raising the prospect of a fresh wave of refugees as Europe wrestles with surging inflation and recession, while in Rome, Draghi has been pushed aside and a seasoned rabble rouser is trying to destabilize the rookie prime minister.
Salvini, 49, had been on course to lead his own right-wing government before a series of missteps opened the door to Meloni, another immigration hawk. But although the premier has spent all her adult life in politics, she has almost no experience of governing and is struggling to control a rival who helped to force out Italy’s last two leaders.
From the start, Salvini has sought to eclipse the prime minister with agenda-setting campaigns over issues like policing and infrastructure spending.
Meloni had taken office pledging to tackle Italy’s longstanding economic problems. Instead, she found herself cracking down on illegal concerts, raising the limit on cash payments and funding work on a bridge to Sicily -- all in response to broadsides from Salvini.
There is now mounting concern among Italian officials from across the political spectrum that her domestic tussles could lead Meloni to take her eye off the ball on the public finances or trigger a more serious rift with the rest of the European Union. Bloomberg spoke to a dozen officials from Italy and other Group of Seven countries who all voiced similar fears and asked not to be named discussing the challenges facing the government.
Meloni’s biggest problems have come over immigration, the issue that Salvini has mined more consistently than any other.
During the coalition negotiations in October, Salvini managed to install his former chief of staff, Matteo Piantedosi, as interior minister, giving him control of border security. As his first act, Piantedosi revived a signature Salvini move of blocking migrant rescue ships from docking at Italian ports, a policy that has been declared illegal by the EU and by Italian courts.
That positioned Salvini, rather than Meloni, in center stage as the defender of Italy and Italians and caught the prime minister on the back foot, according to officials familiar with her thinking.
So when the idea that France would allow one of the ships to dock was floated, Meloni jumped the gun with an ill-judged jibe. “We welcome France’s decision to share responsibility for the migration emergency,” she said in a statement. “Until today it was shouldered by Italy and a few other Mediterranean states alone.”
The statement was pulled together in a rush without the usual checks, according to people familiar with the process, and it provoked a furious response from Paris.
French Interior Minister Gerald Darmanin is another immigration hardliner who was appointed by President Emmanuel Macron to fend off attacks from nationalists in France. He said that Italy’s refusal to allow the migrant ships to dock was “incomprehensible,” “unacceptable” and “irresponsible,” and threatened to impose border controls between the two countries.
Italian President Sergio Mattarella made a phone call to Macron as the French president flew to Bali for a summit of Group of 20 leaders which helped to smooth over relations. But even so the dispute hung over Meloni’s G-20 debut where there was a notable souring in Italy’s relations with both France and Germany, diplomats said.
Meloni held meetings with Biden and with Chinese President Xi Jinping. But in private diplomats questioned her ability to steer Italy through recession and rising interest rates when she faces such severe crosswinds from inside her government.
For now, she’s maintaining that delicate equilibrium.
The government’s first budget law sticks to her commitment to reduce Italy’s debt burden, even as it finds money for Salvini’s pet initiatives, such as a small reduction of the retirement age and lower taxes for the self-employed.
But her balance is likely to be tested more seriously in the coming months. Interest-rate hikes from the European Central Bank will push up the cost of borrowing for Meloni’s administration while economists estimate that the economy may already be in recession.
And then there’s Ukraine. Meloni is determined to keep sending military aid to the government in Kyiv, but Salvini and Silvio Berlusconi, another crucial coalition partner, have voiced their admiration for Vladimir Putin in the past. Berlusconi was boasting of his friendship with Putin only last month.
--With assistance from Julius Domoney, Michael Nienaber and Ania Nussbaum.
©2022 Bloomberg L.P.
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