The EconomistJuly 13th 2019 Europe 492 to run a budget deficit of 3.5% of gdpnext
year, at odds with the government’s projec-
tion of 2.1%. The difference comes down to
whether or not a value-added-tax increase,
which has already been legislated for,
comes into effect. The commission points
out that such stopgap clauses have consis-
tently been repealed in recent years. Both
Messrs Salvini and Di Maio, aware of its un-
popularity, have already promised to avert
the increase. That means somehow finding
an additional €23bn. No one knows where
that money would come from. Mr Di Maio
has already ruled out cuts to welfare spend-
ing. And on top of the expected big deficit,
Mr Salvini wants to cut taxes further in pur-
suit of his promised flat tax of 15% for com-
panies and individuals.
Mr Salvini’s call for more fiscal flexibili-
ty is not by any means absurd: many econo-
mists reckon the eu’s rules are too tight.
The problem is that Mr Salvini has antago-
nised the commission and northern mem-
ber states, which are wary of being on the
hook for other countries’ profligacy. So Mr
Salvini is not likely to get much slack from
European leaders. Though the European
Parliament elections in May were a tri-
umph for him domestically, at the Euro-
pean level they were a disaster. He had
staked out a claim to lead a pan-European
alliance of nationalists that would change
the face of European politics, the nation-
alist cause failed to make headway beyond
Italy. Mr Salvini’s reckless rhetoric has
made it less likely, not more, that Germany
and the “New Hanseatic League” of fiscally
orthodox northern European countries
will indulge him.
Mr Salvini has done nothing to help his
cause in Europe by courting Vladimir Pu-
tin. He has been spotted wearing a Putin t-
shirt, is a frequent visitor to Moscow and
has allowed the Veneto region, run by the
League, to recognise Crimea, a chunk of
Ukraine that Russia has illegally annexed.
This infuriates the eastern Europeans who
might otherwise be his allies. The suspi-
cions of a sinister Moscow-Rome axis have
been stirred by tapes, published this week
and confirming earlier reports, that appear
to show a former close aide to Mr Salvini
meeting unidentified Russians in Moscow
to discuss the secret funding of the League
with money derived from a dodgy oil deal.
Mr Salvini says he has never taken “a rou-
ble, a euro, a dollar or a litre of vodka”, and
there is no evidence that any money was
ever actually paid to anyone.
Long range effects
Even if a crisis is again averted this au-
tumn, a deeper fear about Mr Salvini re-
mains. It is not so much what he has done,
as what he has failed and will fail to do.
Matteo Renzi, prime minister from 2014 to
2016 and a genuine reformer, is scathing.
“He seems macho, but what has he everdone that is brave?” he asks. “He is not a
leader, he is an algorithm.” Certainly the
first year of Mr Salvini’s pre-eminence has
seen nothing that suggests that the all-pop-
ulist government has any interesting plans
for doing anything about Italy’s chronically
low growth. Fighting with Brussels and
turning away boatloads of migrants are
good ways to fire up supporters, but such
gestures do not create jobs.
Italy’s problems remain what they al-
ways were: a labyrinth of regulations that
discourage companies from growing, and
labour laws that entrench the power of un-
ions in larger companies, doing more to
protect those already in work than open up
chances for those outside it. Francesco
Grillo of Vision, a think-tank in Rome,
notes that Italy spends more than four
times as much on pensions as on educa-
tion. And yet one of the early acts of the
new coalition was to undo modest pension
reforms that would have made the system
more affordable. If you join the workforce
at 18 and work continuously, you can now
retire at 60.
The new government has done virtually
nothing that would help with any of this.
The League has, to be fair, pushed for new
procedures that could speed up the approv-
al of infrastructure projects. The proposed
sblocca cantieri(“unblocking works”) bill,
however, has so far been opposed by the
m 5 s. One of the m 5 s’s main appeals to vot-
ers has, after all, been the promise to crack
down on corruption, and short-circuiting
the approvals process risks undermining
that fight.
Added to that, the government policies
that have been enacted have been shoddily
executed. The size of the “citizen’s income”
that the state will hand out was set arbi-
trarily, says Tito Boeri, formerly the head of
the national social-security administra-
tion. It is too generous to single people,
particularly in the south. Payments taper
off as soon as a recipient earns more, which
risks discouraging the unemployed from
taking up work.
The government has also done little ornothing to tackle vested interests. Impor-
tant reforms such as broadening the tax
base, eliminating tax loopholes and over-
hauling the judicial system have fallen by
the wayside. This lack of focus on eco-
nomic growth and lingering doubts over
the commitment to the euro might be why
Italy’s bond spreads are higher now than
before the elections in 2018.Mystery man
The next few months will reveal if the co-
alition prizes its credibility with investors.
Financial markets have been relatively
calm this year, with investors pricing in
compromise, not confrontation, with
Brussels. But spreads could quickly widen
if the coalition does not restrain its budget
plans. The banking system too is vulner-
able: holdings of Italian sovereign debt ac-
count for a tenth of Italian lenders’ assets,
well above the euro-area average. Part of
that portfolio would be repriced as bond
prices fall, eroding banks’ ability to with-
stand losses. A hit to the economy would
close the “doom loop”, where weak sover-
eigns and banks drag each other down.
Past experience, in 1992 and in 2011,
shows that governments tend to buckle un-
der pressure from the markets. So far this
coalition has been no different. And the el-
ements of a compromise do exist. Mr Salvi-
ni could further moderate his programme
of tax cuts. A small increase in vatmight
help plug the gap, and have the virtue of
signalling a commitment to fiscal disci-
pline. Meanwhile Brussels may be content
to accept a slightly higher deficit, provided
it does not breach the 3% threshold.
But Mr Salvini may decide otherwise.
He may stick to his guns; or he may surren-
der. He may force an early election; he may
not. The troubling fact for Europe is that no
one knows what this meteor that has
flashed across Italy’s skies will do next.^7Tick, tockSource: Datastream from RefinitivItalyGDP,%change
ona yearearlierTen-year government-
bond yield, %2011 13 15 17 19024682011 13 15 17 19-4-3-2-1012