Almost all of Italy's enormous modern debt burden was accrued as a more or less inevitable consequence of policy decisions taken in 1980s, but the presence of a large state-owned component of the economy certainly made an excessive spending pattern easy to put in place and indeed had influenced spendthrift habits since the 1970s. For reference, this graph visualizes how Italian debt, while creeping upwards since the recessionary 1970s, remained under the "ideal" EU threshold of 60% up until it skyrocketed in the 1980s. Political disorganization in the 1990s, coupled with the popularity of a purely "negative" view of state action (in the sense of "negative freedom" as defined by legal scholars) led to inaction in the face of an enormous debt burden.

Part 1: Ain't no Party Like the Pentaparty

So what happened in the Italy of the 1980s? Well, the election of 1983 was a pivotal one in the modern history of Italy. Damning high-profile scandals had driven the public's trust in the long-governing Christian Democracy Party to an all-time low. The Italian Communist Party registered just under 30% of votes, only a few points less than the Christian Democrats. This was the smallest ever gap between the two historic opponents, and it looked like the only stable governing coalition would be an improbably Christian-Communist alliance. Communist Party general secretary Enrico Berlinguer had actually been pushing for a union of this kind since the 1970s (even reaching a weak confidence-and-supply agreement in tumultuous 1976) and a current within the Christian Democrats also liked the idea (although their influence had been waning ever since the faction's leader, Aldo Moro, was kidnapped and murdered by Red Brigades in 1978; a horrific and catastrophic security failure which would tarnish several high-profile Christian Democrats with severe accusations of not having done enough).

But the mainstream Christian Democrats feared Italy would face certain ostracization by NATO allies as well the European Community in the event of Communist participation in government. Because of this, the upper tiers of the Christian Democracy Party had already taken preemptive measures while the campaign was still underway. In a camping van outside the Italian Socialist Party congress in Palermo, Christian Democracy stalwart and former Prime Minister Aldo Forlani met with Socialist leader Battino Craxi. The two men agreed that no matter the electoral result, the Socialists would coalesce with the Christian Democrats. Craxi, an imposing figure both physically and politically, drove a hard bargain and obtained the promise of being nominated to the office of Prime Minister. This was no small concession, but the fear that the Socialists would form a coalition with the Communists and leave the Christian Democrats in the opposition for the first time in postwar history was very tangible. Once the press got a hold of what had happened, the agreement was dubbed "The Camping Van Pact" (Il Patto del Camper).

Over the course of the 1983 election Craxi had expertly positioned his party on the middle ground between the Communists and Christian Democrats. The Socialists were rewarded with 11.44% of the popular vote, one of their best results of all time till then. Craxi and his Socialists were also helped by political discourse in the country having become more open to including smaller parties outside of the Christian-Communist system which had dominated Italian politics since the 1940s. As an example, the minute Republican Party also crept up in the polls (President of the Republic Sandro Pertini had already appointed the Republican leader Giovanni Spadolini to the Prime Ministership following a dramatic scandal which had forced the aforementioned Arnaldo Forlani to resign).

While Craxi was made Prime Minister, his fellow Socialists were only given a few token ministries. Major appointments remained in the hands of the Christian Democrats, with the Foreign Ministry going to the wily Christian Democrat mandarin Giulio Andreotti, young Christian Democrat upstart Giovanni Goria made Minister of the Treasury, and Christian Democrats were also appointed to the Ministry of the Interior and the Ministry of Justice. As a way of compromise, the Ministry of the Economy went to the Social Democrat Pietro Longo until judicial troubles forced him out in 1984. The Finance Ministry went to the Republican senator Bruno Visentini, already notable for having introduced legislation on corporate financial transparency in the 1970s. The popular Republican leader Giovanni Spadolini was made Minister of Defense, and set about working to improve the Socialist government’s legitimacy abroad by confirming the government’s Atlanticist alignment and recommitting Italian forces to peacekeeping operations in Lebanon. This coalition of Christian Democrats, Social Democrats, Republicans, Liberals, and Craxi’s own Socialists would come to be known as "The Pentaparty."

And here we get to your answer: While the Socialists had participated in governing coalitions in the past, they now had the power to set the government's order of business. Although Craxi's Socialists were only given a few ministries (loyal henchman Giovanni De Michelis was notably appointed Minister of Labor) this was enough to place the Pentaparty as an unmistakably left-wing government in spite of the exclusion of country's largest left-wing party. Fiscal conservatism was never going to be on the agenda, and the national debt skyrocketed from 65% of GDP to 92% of GDP over the course of Craxi's premiership.

Unsurprisingly, this fiscal expansion made Craxi's government unprecedentedly popular while in power. Consumer consumption was at an all-time high, and Italian GDP surpassed Great Britain's in a widely commented "Sorpasso" to become the world's sixth-largest economy (or, as the Socialists were wont to put it, "Fifth in the West"). Liberalizations, especially in the realm of media and entertainment, ushered in a new mood of good feeling and constructed a culture of conspicuous consumption (for the one thing Communist and Christian politicians shared was their austerity and somberness leading to neglect the entertainment industry, but no such inhibitions hampered camera-friendly and media-savvy Socialist leadership). Italy had won the Football World Cup in 1982, and for the first time since the Fascist regime began developing a sense of good feeling tied to national pride. Liberalizations were also pushed through in the realm of finance, favoring the creation of mutual funds and asset management companies. Newly deregulated television channels, advertising agencies, and financial institutions would create a spate of high-paying jobs that would feed "Yuppie" culture and transform the city of Milan, home to Italy's banks and stock exchange, from an austere bourgeois bunker into a mecca of television, consumerism, and hedonism.

But Craxi and his government were also particularly well-positioned to balloon economic growth through the national debt thanks to preexisting characteristics unique to Italy. A holdover of the Fascist regime was the enormous centrally planned component of the Italian economy. The retention and maintenance of this system was one of the things Christian Democrats and Communists had long agreed on. Key industries — including iron and steel, construction, transport, and telecommunications — were majority-owned by the Istituto di Ricostruzione Industriale (IRI), the Finance Ministry's holding company. Further, major corporate loans were issued by the Istituto Mobiliare Italiano (IMI), an investment bank also owned by the Finance Ministry.

The system, initially conceived to lift the economy out of the Great Depression and prep the country for war, had translated well into the 1940s and 1950s as IMF and Marshall Plan money was funneled directly into strategic industries. But with time, accusations were made that the long-ruling Christian Democrats had been politically motivating managerial appointments and influencing business decisions. Over the course of the 1970s state-owned corporations would organize major hiring drives just prior to elections, but the country's labor laws made reductions of personnel much more difficult, turning these state-owned companies into enormous money sinks.

While the Christian Democrats had ballooned the state-owned industries, once in power the Socialists did nothing to curb this growth. In fact, they hatched a plan to develop their own fortuitous patronage network! The Socialist party resolved to receive illicit donations from small and medium sized business owners in exchange for offering favorable use of state-owned assets and subsidies (fashion and television, for example, were industries particularly pampered by the Socialists; while this was only a small component of the overall economy, being associated with these industries offered them disproportionate media exposure).

Why Craxi's successors didn't reduce the debt follows below, after the jump.