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Markets across Europe surged Friday. The euro fell, inventories plummeted and public debt yields rose. Italy was at the epicenter of all the trouble. After a few months of relative political calm, Italy is once again at the center of European politics.
The source of the tragedy this time is the country's coming budget – the first under the populist coalition government of the Northern League and the Five Star Movement. The question of the budget is in fact a conflict between the leaders of the two parties, the euro zone and the Italian technocratic finance minister, Giovanni Tria.
What exactly is going on? The fiscal crisis goes back to the March general elections. Five Star and the League used platforms based on anti-austerity policies, high spending on infrastructure and social assistance, and tax cuts for low-income Italians.
Both sides opposed political parties in Italy and their inability to keep their promises over the years. Now, after the success of the election. Five Star and the League must live up to their manifesto commitments if they want to avoid massive hypocrisy.
Major infrastructure and welfare spending obviously require a lot of money. This in turn means government borrowing. Italy already has a national debt above its GDP, at about 130% of GDP, and major spending should push it even higher. Luigi Di Maio, the leader of the Five Star, and Matteo Salvini, the leader of the League, are both comfortable with increased debt, but the finance minister they named, Tria, does not it's not.
Tria wants to pursue a more financially responsible strategy aimed at reducing Italy's considerable indebtedness. He proposed capping Italy's budget deficit at 1.6% of GDP – the gap between spending and government revenue – which Five Star and the League reject.
The parties officially rejected Tria's proposal last Thursday, saying in a statement that they had agreed to set Italy's budget deficit at 2.4% of GDP, a significant increase from the level current.
"The importance of fiscal discipline has not been shared by the two main players in the government alliance," said Paolo Pizzoli, an economist at the Dutch bank ING, in a note released Friday.
"Matteo Salvini and Luigi Di Maio both converged on the idea that more budget room was needed to implement their election promises."
The conflict is so intense that Tria threatened to resign before giving in.
So what's the problem? Well, a budget deficit of 2.4% of GDP risks putting Italy in breach of EU tax liability rules. This could lead to sanctions on the part of Brussels against Italy.
"In case of great inadequacy and ongoing confrontation, we do not rule out the future reopening of an excessive deficit procedure against Italy," said Pizzoli in his note.
He added: "In the absence of forecast details on budget and growth, it is impossible to assess to what extent EU budget requirements will not be met in the deficit profile. planned".
It should be noted that the crisis is not likely to be as serious as might have been expected after Five Star and the League "accepted the introduction of the three strengths of the government program: the introduction of 'a flat tax, the relaxation of the pension reform and the introduction of a form of universal minimum income and pension would necessarily follow a fragmented approach.'
It is clear, says Pizzoli, that Italy is not ready for an "enormous fiscal crisis".
