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Chico Harlan
Head of the Rome office covering the south of Europe and sometimes parts beyond
ROME – Since the Italian coalition came to power four months ago, a nervous Europe wondered whether the realities of governance would prompt Italian leaders to give up some of their most expensive populist promises.
For legislators and traders from Brussels to Berlin, the clearest answer to date has now come in the form of a figure: 2.4%.
This is the announced target for Italy's budget deficit for 2019 as a percentage of gross domestic product – and it suggests that the new Italian coalition will spend much more aggressively than its center-left predecessor. It also indicates that government leaders are willing to shed markets and even challenge European fiscal rules to try to do what they said during the election campaign: to overturn standards in a country whose economy is weakened for two decades.
It is partly because of the frustration caused by this stagnation that pushed Italy to move away from general politics and a coalition of two parties that proposed to crack down on immigrants and generously extend the Welfare state. Some of them in Europe had hoped that more cautious voices in the Italian government, including the country's minister of economy, would win the debate on these expansions. But the opposite happened during deliberations that ended Thursday night.
The new target for fiscal deficit seems to be breaking a European demand that heavily indebted countries work to reduce their burden. Other countries, including France, have breached European tax rules and have not had any major consequences.
But economists and analysts said Friday that Italy had presented a new case, largely because its challenge for Europe seemed more intentional and calculated politically. Italian politicians hit the Brussels bureaucrats and said their restrictions were counterproductive.
"If there is one thing this coalition seems to be tireless about, it is to spend more and challenge Brussels," said Hosuk Lee-Makiyama, director of the European Center for International Political Economy.
How Europe approaches Italy's budget plans – which have not yet been finalized – will depend on the attitude of other leaders, particularly in Germany. The European Commission could push Italy to make changes or, in a much more spectacular move, to press for financial sanctions. But Italy could argue that other countries have done worse and that new spending is the way to spur growth and revive the economy.
"It will become a showdown," said Fabian Zuleeg, Director General of the European Policy Center.
Fears have eased since the beginning of the year as Italy could leave the eurozone. But investors remained anxious about managing the fourth largest economy in Europe. Friday, the Italian stock index fell 3.7%, the worst day for over two years, according to MarketWatch. Investors feared that Italy would wait for downgrades in credit ratings. In the worst case, Italy could plunge Europe into another perilous phase in which it deals with the flickering banks of a heavily indebted country.
The problem for Italian populists is that the country does not grow fast enough to pay for everything it wants, at least not without borrowing. The International Monetary Fund expects the Italian economy to grow by 1.1% in 2019, which is two times less than other advanced economies. Italy's debt represents about 130% of its gross domestic product, a ratio which is the second largest in Europe for Greece.
But on Thursday night, Italian government leaders said their planned fiscal target would achieve many of their political goals, including tax cuts, a lowering of retirement age and a basic income for the poor. . Five Star leader and deputy prime minister Luigi Di Maio sparked a series of Facebook posts on Thursday night, saying Italy was "erasing poverty" and "giving dignity back" to retirees.
"Tomorrow," he wrote, "we will wake up in a new Italy.
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