Italy will keep blinking in 2019

In 2019, Italy will return to its rightful place as the European country where few things of relevance really change.

Economists fretted that Italy's break with Europe could be worse than Brexit. Political scientists predicted a domestic crisis worse than France's discord.

A leadership vacuum worse than Germany's without Merkel. Italy, pundits said, was the Achilles heel, the soft underbelly.

It would be where democracy slid backwards like in Poland or Hungary. The place where the budget reality and populism would crash and burn.

But by the end of 2018, it was clear that none of the doomsday scenarios would happen. Italy blinked in its showdown with the European Union over its budget-busting 2019 fiscal plan.

The budget breached Brussel's deficit rules and much hand-wringing ensued as the European Union and the European Central Bank held firm in their opposition. In the last week of 2018, the ruling Italian populist coalition backed down.

What happened to suddenly deflate what The Economist defined as "slipping down a slope that will lead Italy to a Greek or Argentinian-style financial abyss"?

Three dynamics have come together to defuse the crisis.

First, after a bruising few years of political attacks, Brussels finally started winning a few rounds against the growing populism of member states.

Budget battle

After taking a tough stand - and winning - on Poland's judicial backtracking, the European Union deserves similar kudos for taking a firm line to move the new Italian government's proposed deficit from 2.4 to 2.0 percent.

Though the new Italian government will get to keep its electoral promise to lower retirement ages and phase in a new income support scheme, it has had to compromise on the speed and size of its proposed social package.

This doesn't mean that peace now reigns between Italy's populist coalition and Europe's bureaucrats.

Italy is ripe for a continued slog with Brussels.

Indeed, for the right-wing League and left-leaning Five Star coalition, a diet of strife with Europe is just what the doctor ordered.

But expect the fights to be political skirmishes, not Brexit-like life and death duels.

Italians have long sought to avoid the difficult adjustments and reforms that neighbours such as Spain undertook after the financial crash.

This government is no different and Italy's populist leaders will do all they can to shift the blame of Italy's stagnation onto Brussels.

Italy's per capita income has not increased in the last 25 years.

The youth population is unemployed, especially in the south. Its GDP still hasn't recovered to levels from 10 years ago. It suffers from poor education, low levels of productivity, and byzantine tax codes. It ranks 111th in ease of doing business.

These issues aren't going away anytime soon.

Economist Luigi Zingales of the University of Chicago's Booth School of Business emphasises that, though Italy's problems are making headlines lately, they started in the mid-90s.

"The problems pre-exist this government and unfortunately will survive this government," quipped Zingales in an interview on the global politics podcast Altamar.

Second, internal divisions are rising inside the Italian government.

Marriage of convenience

The League and Five Star unity is a marriage of convenience. Together they poll an unprecedented 60 percent, but where Five Star was once the front-runner, the right-wing League has now pulled ahead.

The League's wily leader, Matteo Salvini, has played a strategic hand until now.

Immigration and race-baiting have played well with an Italian public that perceives immigration as out of control.

But he will soon have to decide whether the League keeps moving to the far-right or whether it tries to broaden its appeal by moving to the centre.

Salvini, whose budget plan was criticised by Italy's business lobby, can't afford to lose support of northern Italy's small businesses.

Meanwhile, the leftist Five Star Movement is quickly realising that its declining poll numbers are inversely proportionate to the growing support for its coalition partner.

The two parties' inevitable ideological differences and political rivalry will rise to the top of 2019's political agenda, weakening the government's resolve.

Last, no matter how hard Italy's populist government pushes against Europe's establishment for political gain, this is not the government that will walk Italy out of the Euro or the European Union.

It is true that support for Europe, its currency and its institutions has declined in Italy over the past years. But, 59 percent of Italians still support membership in the single currency, according to Eurobarometer.

This puts distinct limits on this government's bravery.

Italy's government had to back down over the budget dispute because it knew that EU sanctions and an economic market downturn would have ultimately hurt Italian voters. Every Italian leader knows that trying to pull out of the EU will do more damage than help.

Italy's government will surely find other ways to take on the EU in 2019 – fighting with Brussels is too politically beneficial for the ruling coalition to resist. But expect this fraught relationship to bend, not break.