Italy Has No Fiscal Discipline Whatsoever

European Union Under (Internal) Threats
Recently we raised the question as to whether the present Eurozone can survive.  Clearly the UK’s leaving will remove one of the major funding countries within the EC.  When Greece blew up, Angela Merkel was successful in persuading Europe to socialising the debts of Greece in exchange for far more fiscal austerity.  

But Italy’s problems are of a different magnitude altogether.  Italy has formed a government which has no fiscal discipline whatsoever.  John J. Xenakis explains why: 

Italy’s plummeting financial markets have mostly recovered and appear to be stabilized as the “populist” government that had appeared to collapse early in the week came to power, though with a different cabinet of ministers. 

The “populist” coalition is between the left-wing Five Star Movement (M5S), led by Luigi Di Maio, and the right-wing La Lega (The (Northern) League), led by Matteo Salvini. Although the two parties differ on many issues and distrust each other greatly, they decided to form a coalition based on their shared anti-euro, anti-EU, and anti-immigrant policies, and particularly on the fact that they have no fiscal discipline whatsoever.

Di Maio and Salvini had chosen as finance minister Paolo Savona, who in the past had raised objections to Italy being in the eurozone and euro currency. Fearing a financial disaster, Italy’s president, Sergio Mattarella, vetoed the selection of Savona, and the proposed government collapsed. Di Maio and Salvini claimed that Mattarella was catering to the demands of Brussels and Berlin, rather than to the will of the people of Italy.

For a couple of days, Italy’s government was in total chaos, and it looked like Mattarella had made a major political blunder. Despite the vitriolic political atmosphere in Rome, the chaos caused heads to cool, and Di Maio, Salvini and Mattarella reached a compromise, where Savona would be given a different job.

So now the European Union and the European Central Bank have to face the reality of dealing with Italy’s new government. On the immigrant issue, Salvini wants to deport half a million illegal immigrants living in Italy, and he is being criticized as xenophobic, as are far-right parties in other countries, such as Germany’s AfD and the National Front in France.

Economically, Italy is already a disaster, with public debt standing at €2.17 trillion, or 133 percent of gross domestic product (GDP). This also could cause a major eurozone financial crisis, significantly worse than the one caused by Greece’s public debt.  But instead of looking for ways to reduce that debt, Di Maio and Salvini want to increase it by another €125 billion. Right-wing Salvini wants to cut taxes. Left-wing Di Maio wants to substantially increase public spending, including providing a guaranteed minimum income of €780 per month to each person.

So Italy’s government has stabilized for now, but few people expect that stability to last long.

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