The country is in trouble. It rests on an unfair and inefficient politico-economic equilibrium, which hinders innovation, competition and creative destruction to protect vested interests. Average incomes have barely grown for a quarter of a century. And distrust for the political system is deep and widespread. Hence the success of demagogic politics, on both sides of the political spectrum.

The main beneficiaries were the Five Star Movement and the far-right League. At the March 2018 election they won 33% and 17% of the vote, respectively, and formed a government together, which challenged and momentarily rattled the EU.

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Although the two parties might seem similar, however, their coalition was always an ill-starred one. As I explained here before, while Five Star rose to challenge Italy’s political establishment, the League is a party of the status quo. Its rhetoric, which acts as a cover for that strategic priority, is directed against immigrants and Europe; Five Star’s is couched in the language of transparency, accountability, public integrity and the rule of law – all urgent priorities, but ones that challenge the vested interests that the League represents.

Indeed, before starting serious negotiations with the League, Five Star explored a possible alliance with the Democratic Party (PD) – the mainstream centre-Left party that dominated the 2013–18 cabinets, which did very little to change that equilibrium, and suffered a stiff electoral defeat in 2018. Although they were political adversaries, policy compatibility seemed greater between them than between Five Star and the League. Five Star and PD could have found common ground in vital areas – on social insurance reform, for example, on the fight against corruption and tax evasion, on public administration reform, and on a pro-growth public-expenditure review. I argued at the time that I saw a Five Star-PD coalition as the preferable solution in a hung parliament.

But the talks were called off when the PD’s former leader – Matteo Renzi, who had resigned but still controlled the parliamentary party – vetoed them, mandating the party to go into opposition. Five Star and the League had won the elections, he said, and should govern together (“we’ll sit back, watch the show, and eat popcorn”, he added). So the second largest party effectively withdrew from the game of coalition making, and Five Star and the League began their negotiations in earnest. What followed was quite a show.

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Mutual suspicion led Five Star and the League to write down a detailed coalition contract and choose a non-partisan PM (an unknown academic, Giuseppe Conte, without any political or executive experience). Lacking either a clear policy vision or a plausible diagnosis of the country’s problems, Five Star was thoroughly outmanoeuvred by the League. Under Matteo Salvini’s leadership, the party was skilful in directing discontent against scapegoats such as migrants, Brussels, and even burglars, and then used its rising popularity to open political battles with Five Star, one after the other, corner it, and pass the legislation it wanted – often cruel, in the field of migration and law and order, and sometimes absurd. Having stimulated the demand for such policies with his divisive, hate-filled rhetoric, Salvini could satisfy the interests of his core electorate – with targeted tax cuts, an amnesty for tax evasion and spending policies that favour vested interests – while paying no political costs.

On the contrary, over 12 months the balance of power within the coalition was reversed. In the latest opinion polls before the government fell the League stood at 36-39%; Five Star, which appeared to have renounced its foundational public-integrity message, stood at 16-17%.

It was to cash in this surge that Salvini abruptly denounced the alliance with Five Star, on 8 August, claiming that his coalition partner was blocking the League’s policies. He was aiming for a snap election, to win enough support to govern alone (or together with a small grouping of neo-fascists and the far-right Fratelli d’Italia, Brothers of Italy). In a tour of the country’s beaches, wearing swimming trunks, neck chain and sunglasses he demanded full powers to make Italy great again.

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The League seemed unstoppable, and disquiet swept the country. Not just in the op-ed pages but also in the streets, and the beaches: after Salvini’s ‘full-powers’ speech, loud and imaginative crowds of protesters began to disturb his seaside pronouncements.

But the dissolution of parliament is a prerogative of the head of state, and during the summer recess it took a while for the League to have parliament table its motion of no confidence. So the tempo of the crisis was slowed down, and the League’s opponents could reorganise.

On 13 August Renzi surprised everyone by proposing a Five Star-PD government, to avert the risk of the far right winning an outright majority.And when parliament was finally convened, on 20 August, Salvini suffered a rare public-relations defeat. When in the Senate Conte reproached the League’s leader for some of his more shameful measures – each of which Conte had formally endorsed, naturally, voicing hardly any reservation – Salvini stumbled. He seemed as effective in delivering slogans on a beach, mojito in hand, as he was ill-at-ease facing reasoned criticism in parliament, lacking even the wit to call out its hypocrisy.

Conte had been ridiculed for his embellished CV, and then disparaged for meekly bowing to Salvini’s ever growing demands, but that day became a statesman in the eyes of some observers.

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Thus the dynamic of the crisis changed. The League appeared to be losing support, talks on a Five Star-PD cabinet commenced, and Salvini began to backtrack, eventually inviting Five Star to form another government together. Five Star refused; its talks with the PD proceeded.

Despite commanding twice as many parliamentary seats as the PD, Five Star had little bargaining power. It was the party that feared snap elections the most, for it could lose more than half its votes, and it had just demonstrated remarkable executive incompetence and tactical ineptitude.

The PD, however, was and remains split between Renzi’s faction, more centrist and liberal, and a loose alliance of other factions, both centrist and left wing. These divisions strengthened Five Star’s hand, to the point that when it demanded the reappointment of Conte as PM – which Donald Trump unsurprisingly supported – the PD obliged, at Renzi’s insistence.

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The deal was struck on 28 August. The following morning the head of state reappointed Conte as PM. Five Star and the PD then drew up a programme. On 3 September the deal was overwhelmingly approved by Five Star’s registered members (fewer than 60,000 voted). And by 9 September Conte and his cabinet are expected to receive parliament’s vote of confidence. Things have come full circle, after 14 months of mostly damaging or pointless executive action.

The markets reacted positively: after a significant spike in the wake of Salvini’s no-confidence motion, the interest-rate spread between Italian and German treasury bonds fell consistently, and now stand at the lowest level since May 2018 (when the League and Five Star agreed their coalition).

Yet it is hard to be optimistic. Past performance suggests that Five Star lacks the ideas and the PD lacks the will to change Italy’s social order, which lies at the roots of the country’s malaise. All that can be said in favour of this cabinet is that it is likely to be better – less ill-intentioned, frankly, and possibly more competent – than its predecessor, and that it may gain useful time for opponents of the far right, and perhaps also for fresh, better political options to emerge.

Having frightened much of Italy and Europe, Salvini ultimately appeared weaker and less skilful than it was assumed. His past successes stemmed from the weakness of his competitors. But if this coalition disappoints, Salvini will rise again.

That’s not to say that the League’s xenophobia is insincere or negligible. In 2000, its activists herded a dozen pigs into the field where a Muslim community planned to build a mosque, for example, and three years later its founder – Umberto Bossi, then minister for institutional reform – advocated using artillery against boats carrying migrants to Italy’s coasts. After the third warning, he said, “I want to hear the roar of cannons”.

Salvini’s recent policies against NGO rescue operations seem mild in comparison. But these aren’t especially deeply felt: they are tactics employed to muster support from the majority of voters whose interests, meanwhile, are being damaged by the League’s real priorities. Indeed, its rhetoric has changed in tune with the anxieties and opportunities of the period.

Before immigration rose in the 1990s, its scapegoat (when it was exclusively a party of the North) was southerners, whom it denounced as lazy welfare recipients; before it was nationalist, the party was federalist and fleetingly secessionist; before it was fervently Catholic, it staged elaborate rituals to honour the river that crosses the peninsula’s northern plain, the Po.

The only constants are the scapegoating and its relentless effort to cast itself as at one with the man in the street.

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This serves a strategy whose main pillar is keeping the rule of law weak. Karla Hoff and Joseph Stiglitz defined this notion as “what stops the few from stealing from the many”; the League uses demagogy to distract the many while the few steal from them. And this is the real danger the party poses.

In Italy, average real incomes are roughly at the level they were in 1995 – in France, Germany and Spain they are about 25% higher – and political discontent is intense and widespread. The primary cause of this malaise is not the euro but stagnant productivity growth, which began to decline well before the establishment of the common currency.

Italy’s large public debt is itself a manifestation of that problem. Its roots lie in a politico-economic equilibrium that hinders innovation, competition and creative destruction, which are crucial drivers of productivity growth and prosperity. Low political accountability and a weak rule of law are the main traits; clientelism and illegality its clearest manifestations. Tax evasion is between two and three times higher than in France, Germany, or Spain, for example, and corruption is at levels typical of the Balkans.

Italy is an open democracy, served by an economy – which has Europe’s second largest manufacturing sector – that reliably produces healthy current account surpluses. But its social order is markedly less efficient and fair than its peers’: to protect the country’s elites, it constrains the opportunities of ordinary citizens and firms, raises inequality, and dampens the country’s potential.

In order to shore up this unbalanced system, Italy’s governments acquired the consensus of elements of society by granting them certain political and economic privileges. These particularistic policies accumulated over decades, may have made the social order more inclusive. But they reduced the efficiency of public expenditure and prevented the development of a genuinely universal welfare system, which economies based on competition and innovation require.

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This equilibrium and the political establishment that presided over it were shaken in 1992–4, mightily, by a currency crisis and vast corruption investigations. The equilibrium stabilised, thanks to greater budget discipline; but the political establishment collapsed and rapidly dissolved.

The League flourished then, as the fiercest opponent of that establishment – which it described, correctly, as corrupt, collusive, and unaccountable. It gained almost 9% of the vote in 1992, an extraordinary result in Italy’s ossified 1948–92 party system. Yet, in 1991, the party had opposed a referendum that sought precisely to increase political accountability, and a few weeks after its electoral success it approached one of Italy’s largest firms, which was illegally financing the establishment parties, and duly received its own undisclosed contribution.

Its 1992 manifesto – mixing hostility to Rome and the South with threats of tax revolt and secession – was a direct response to the rising tax burden. It argued that the North should keep its own money, and found support among those regions’ professionals, self-employed workers, small entrepreneurs, and their employees. This became the League’s core electorate, and that manifesto barely changed until the 2010s.

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In 1994, the League allied with Silvio Berlusconi, who inherited the priorities and electorate of the old establishment. It supported each of his cabinets – 1994, 2001–6, 2008–11 – and each of their worst policies, including repeated amnesties for tax evasion and a long line of laws whose main aim or effect was to increase impunity for corruption.

Italy’s politico-economic equilibrium was to become less stable because the fiscal space for lifting growth through public spending, to compensate stagnating productivity, and for securing consensus, had been severely reduced. Indeed, Berlusconi’s last government was felled by the European sovereign debt crisis (which threatened the survival of the Eurozone).

Mario Monti’s 2011–13 ‘technocratic’ cabinet, which implemented emergency austerity measures, relied on Berlusconi’s and the centre-Left’s support. The League, alone in opposition, benefited from the fact that those harsh policies, which had contributed to avoiding a catastrophe, soon became unpopular. Under a weak and confused leadership, however, crushed by grave corruption scandals, the League suffered a stiff electoral defeat in 2013.

Salvini inherited a party in ruins. But he could capitalise on its opposition to austerity, to recast the party as an anti-establishment one, and nimbly discarded separatism in favour of nationalism, to expand its support beyond the North. The 2013–18 centre-Left governments did little to either raise growth or make it more inclusive, and Five Star and the League won the 2018 elections by promising cultural and economic protection to those left behind by globalisation.

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In office, however, the League pushed policies that went directly against their interests. It granted a special pension scheme to certain cohorts of workers; it obtained a tax cut for professionals and small entrepreneurs, and demands a yet more generous one; it won a tax-evasion amnesty, wants another one, and proposes to abolish all limits to the use of cash, which will further ease tax evasion; and it defended tooth and nail two junior ministers accused of corruption and embezzlement.

The League is now the main – though not the sole – guarantor of Italy’s equilibrium. It picked up from Berlusconi the standard of favouring vested interests and tolerance for illegality, and inherited much of his electorate. What changed, compared with the period of Berlusconi’s dominance, is that xenophobia is more readily turning from rhetoric into deeds.

This mix worked remarkably well at the European elections in May. It resembles what happened in Hungary, and in other regimes characterised by the combination of corruption and demagogic nationalism (which could be better described as multi-party kleptocracies than illiberal democracies, as Branko Milanović has argued).

In Italy’s better-governed democracy, however, that combination generates greater tensions, which are a permanent source of instability. It’s why the more predatory the League’s policies are, the louder its rhetoric must be. But the xenophobia is a distraction. That’s why those who wish to oppose the League will be ineffective if they simply decry the xenophobia without mentioning the perversion of the rule of law.

Andrea Lorenzo Capussela is the author of ‘The Political Economy of Italy’s Decline’ (Oxford University Press, 2018)