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.”
When will pasta hit the fan?
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.