(Image credit: This content is subject to copyright.)
If you think Brexit is a headache for the EU, just look at Italy's new government. The joint programme of the two populist parties set to take power, the Northern League and the 5-Star Movement, would, if fully implemented, constitute "the biggest shake-up" of Italy's economy "in modern times", says Wolfgang Munchau, of the Eurointelligence think tank, on Reuters.
Elements of the programme include a universal income for the poor; a flat tax for companies and individuals; the abolition of an unpopular recent pension reform; and an increase in the sales tax. The two eurosceptic parties intend to water down recent labour-market reforms and have raised the prospect of a "parallel currency", an eventual replacement for the euro. Its initial function would be to pay off government arrears to contractors and households.
Expect a "real ruckus in Brussels", says Lisa Jucca on Breakingviews. If this mish-mash is implemented in full it would cost Italy around 6% of GDP. It would make "a mockery" of the eurozone's fiscal rules, whereby the government must keep a tight lid on its budget deficit to start tackling its unsustainable debt pile of 130% of GDP. Italy is the single-currency area's third-biggest economy and one of the founding members. "The new government will put radicalism at the heart of Europe."
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
If this radical populist government had emerged three years ago, there would have been a panic in the bond markets, says Ambrose Evans-Pritchard in The Daily Telegraph. Yet today yields have barely budged.
Investors note that the European Central Bank has provided a "comfort blanket". It's been buying Italian bonds with printed money as part of its quantitative easing programme, keeping a lid on bond yields (the state's implied borrowing costs) and buying the government time to get its act together.
The problem now, however, is that the government doesn't want to get its act together as defined by Brussels. It intends to blow up the stage. Italians are sick of the austerity associated with euro membership, and "will not tolerate" another round of it. If subjected to Greek-style treatment, they could well pull Italy out, blowing up the single currency. This is "a new possibility that investors have to calibrate".
Assuming the new government doesn't collapse never a sure bet in Italian politics it probably won't agitate too much if the economic backdrop remains positive. But when the next downturn arrives, "the political chemistry in Italy will be entirely different from the crisis of 2011 to 2014" and not in a way that bodes well for European integration.
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
Investors should buy into the nuclear power renaissance – Merryn Somerset Webb
ETFs are getting active - is your portfolio ready?
