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Italy budget crisis: What you need to know

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Italy political crisis
(L
to R): Luigi Di Maio, Giuseppe Conte, and Matteo
Salvini

Shayanne Gal/Business
Insider



  • A fresh political crisis is brewing in Italy over plans
    for the coalition government’s first budget.
  • The coalition late on Thursday agreed to set Italy’s
    budget deficit at 2.4% of GDP.
  • This is far above the 1.6% level that technocratic
    finance minister Giovanni Tria had lobbied for and puts Italy
    on a collision course with the EU.
  • Italy risks falling foul of EU fiscal responsibility
    rules.


Markets across Europe tanked on Friday
. The euro dropped,
stocks plunged, and yields on government debt spiked. Italy was
at the epicentre of all the trouble. After a few months of
relative political calm, Italy is back centre stage in European
politics.

The source of the drama this time is the country’s upcoming
budget — the first under the populist coalition government of the
Northern League and the Five Star Movement. The issue surrounding
the budget effectively boils down to a conflict between the
leaders of the two parties, the eurozone, and Italy’s
technocratic finance minister Giovanni Tria.

What exactly is going on? The budget crisis
can be traced back to March’s general election
. Both Five
Star and the League ran on platforms based on anti-austerity
policies, high levels of spending on infrastructure and social
welfare, and tax cuts for lower-income Italians.

Both parties railed against Italy’s established political parties
and their perceived failure to deliver on promises over the
years. Now, after success in the election. both Five Star and the
League, must deliver on their manifesto pledges if they want to
avoid claims massive hypocrisy.

Big infrastructure and welfare spending obviously requires lots
of money. That, in turn, means government borrowing. Italy
already
has a national debt bigger than its GDP
, at around 130% of
GDP, and major spending would likely push that even higher. Luigi
Di Maio, Five Star’s leader, and Matteo Salvini, the League’s
leader, are both fine with increased debt, but the finance
minister they appointed, Tria, is not.

Tria wants to pursue a more fiscally responsible strategy aimed
at cutting Italy’s sizeable debt pile. He has proposed a cap of
1.6% of GDP on Italy’s budget deficit — the gap between
government spending and revenues — something both Five Star and
the League reject.

The parties formally rejected Tria’s proposal late on Thursday,
saying in a statement they had agreed to set Italy’s budget
deficit at 2.4% of GDP, a significant increase on the current
level.

“The prominence of fiscal rigour wasn’t shared by the two main
stakeholders of the government alliance,”
Paolo Pizzoli, an economist with Dutch bank ING, said in a note
released on Friday.

“Both Matteo Salvini and Luigi Di Maio converged on the idea that
more fiscal leeway should be left to implement their electoral
promises.”

The conflict is so strong that Tria reportedly threatened to
resign, before backing down.

So what’s the big deal? Well, a 2.4% of GDP budget deficit risks
putting Italy in breach of the EU rules surrounding fiscal
responsibility. That could lead to punitive action from Brussels
against Italy.

“In case of a big mismatch and continuous clash, we won’t rule
out the future re-opening of an excessive deficit procedure
against Italy,” Pizzoli said in his note.

He added: “Lacking projected fiscal and growth details, it’s
impossible to assess the extent to which the EU fiscal
requirements will be missed under the planned deficit profile.”

It should be noted that the crisis is unlikely to be as severe as
might have been expected, after both Five Star and the League
“accepted the introduction of the three strongholds of the
government programme; the introduction of a flat tax, the
loosening of the Fornero pension reform and the introduction of a
form of minimum universal income and pension would necessarily
follow a piecemeal approach.”

It is clear, Pizzoli says, that Italy is not set for a “massive
fiscal splurge.”

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