The Italian government adopted its draft budget on Tuesday after a prolonged confrontation. First reactions from the European Commission were predictably negative, anticipating a drawn out and difficult negotiation. The haggling over details continued, with the Five Star Movement (M5S) denouncing a ‘conspiracy’ to considerably extend the range of provisions on tax amnesty.
The budget reflects a fragile compromise between the Italian government’s two main partners and signals a temporary weakening of the influence of its ‘third leg’, acting as an unofficial backstop for the president Sergio Mattarella. Deputy prime minister Matteo Salvini’s League electoral base is mainly in Italy’s highly industrialised north. The party presses for lower taxes and greater leeway for business; hence the insistence on bureaucratic simplification, cutting the role of the state, a tax amnesty and a flat tax beginning with professionals and small business. The M5S’s hand is strong mainly in the south, where the focus is on state handouts and a larger role for the public sector; hence the priority for a generalised ‘citizens’ income’ which in the fantasy world of deputy prime minister Luigi Di Maio will immediately ‘eradicate poverty’. Both concur, if from different angles, on a considerable loosening of the strings for public and private sector pensions.
Italy has brought together conflicting and partly incompatible priorities with limited resources by expanding its projected deficit to 2.4% of GDP. This is up from the 1.6% indicated by economy minister Giovanni Tria as the tripwire not to be crossed to gradually bring down the debt from its present level of over 130% of GDP. The expansionary nature of the draft budget has been criticised as reckless and amateurish. The disregard for Italy’s international obligations has been widely panned, but both Salvini and Di Maio have repeatedly expressed their determination not to budge from what was approved. In the meantime, the spread from the German Bund rapidly moved to over 300 points from around 150 and stayed there. Apart from the predictable opposition from the left-of-centre Democratic Party, many voices joined the chorus calling for a substantial reappraisal: the European Commission, the International Monetary Fund, the Organisation for Economic Cooperation and Development, the Italian Statistical Office ISTAT and the Parliament’s budget oversight service, among others. The President of the European Central Bank also issued words of caution. The opening shots between the Commission and the Italian government have been more violent than the norm, and the usual letter for clarification is expected to arrive in Rome in the coming days. However, the argument for introducing changes to the rigid budgetary austerity, which is eroding consensus for the EU in a growing number of its members, has some justification in principle and a level of support. The mood in Brussels seems that of avoiding confrontation as far as possible and many see room for a possible compromise. But there are other considerations.
The latest polls show that the League has overcome M5S, which came out on top in the last elections and can count on a much higher proportion of members in both Houses of Parliament. This makes for an unstable situation, and the European elections in 2019 are widely seen as a time for reckoning. Salvini could be tempted to seize the favourable momentum and go also for general elections in the spring, to gain the upper hand in Parliament and at the same time cash in on his impossible electoral promises, before reality kicks in and starts seriously denting his support. A prolonged fight with the Commission and its president Jean-Claude Juncker, encouraging anti-European feelings, condoning talks of leaving the euro and more generally using the EU as a whipping boy, could prove a useful electoral tool, also given the confused nature of M5S’s political message.
This could unleash a crisis which no claim that Italy is ‘too big to fail’ could effectively stem, and could lead to more sobering thoughts. One of the ironies of a government ‘for the people and by the people’, is that the reins of fiscal (and not only) rectitude and coherent foreign policy have been placed in the hands of two technocrats – foreign minister Enzo Moavero-Milanesi and economy minister Giovanni Tria – who have never faced an election. Their insistence on keeping relations with the EU on a constructive basis, and not exceeding red lines on public deficit, has for the time being gone unheeded, but President Mattarella would never vouchsafe a line of action capable of jeopardising Italy’s credibility in Europe, of which he sees his role as that of ultimate guarantor. The ‘third leg’ could be effectively called into action to steer the course towards a way out.
The importance of Italy’s high level of private wealth is not only often underestimated in macroeconomic terms, but also as a dampener of financial adventurism: the mere mention by Salvini of a possible ‘appeal to the people’ to buy government bonds to shore up the economy was met by a sudden vending spree. The situation remains unstable, many variables can come into play and a compromise with Brussels should eventually emerge, even though a question mark remains on the limits of Mattarella’s suasion power over the government. Italian public opinion, like in the UK, is both ill-informed and confused; a recent poll showed that around 44% of Italians would vote in a referendum to leave the EU, but over 63% of the same Italians said they would vote to retain the euro.