Why economists are worried about Italian populists’ government plan

The eurozone may have dodged a bullet when Italian populist parties gave up a plan to exit the single currency, but their free-spending ideas could still set them on a collision course with EU partners, economists said on Friday.

Why economists are worried about Italian populists' government plan
A woman reads the government programme on the M5S website. Photo: Vincenzo Pinto/AFP

More than two months of political deadlock looked to be nearing a close with the unveiling of the plan by the anti-establishment Five Star Movement and the far-right League party.

The manifesto contains a cocktail of measures with a neo-Keynesian flavour designed to stimulate consumer spending and kickstart growth, including drastic tax cuts, a universal basic income and financial help for families — with the aim of reducing the country's gigantic debt mountain of 2.3 trillion euros ($2.7 trillion).

“At face value, the coalition agreement between La Lega and the Five Star Movement threatens to reignite the euro crisis and raises concerns about the sustainability of Italy's debt position,” warned analysts at Oxford Economics.

READ MORE: Here are the key proposals from the M5S-League government programmeHere are the key proposals from the M5S-League government programme
Photo: Tiziana Fabi/AFP

'Irresponsible', 'harmful'

The plan poses “no direct threat to Italy's euro membership”, said Holger Schmieding, an analyst with the Berenberg bank, but it still “includes a list of fiscally irresponsible and economically harmful measures”.

Schmieding said there was every chance that the long list of measures would be “watered down” under pressure from the Italian president, the country's top court and its EU partners. “Although we have to brace ourselves for significant noise, including clashes between Rome and Brussels, a truly disruptive crisis is probably not on the cards for now,” he said.

The parties' supporters say some of the extra costs generated by free-wheeling spending plans could be financed by measures against tax fraud and the waste of public funds. But experts say the strategy still amounts to a monumental gamble, and could well knock off course the trajectory of Italy's annual deficit, which was 2.3 percent of GDP in 2017 and is projected to fall to 1.7 percent this year.

The Oxford Economics Institute puts the combined cost of the key measures — citizens income, tax cuts and lowering the retirement age — at 100 billion euros per year.'

“The planned increases in expenditure and tax cuts are likely to drive Italy's national debt, which is already very high, even further up,” said analysts at Commerzbank.

The two parties have meanwhile vowed that any move to widen the deficit would be “appropriate and limited”.

Instead of inflating the deficit, M5S leader Luigi Di Maio told journalists, the allies would ask the European Union for a rebate of part of the 20 billion euros that Italy pays into the EU budget every year.

Change the rules

The Italian projects have, predictably, raised red flags in Brussels, with EU Commission Vice President Jyrki Ktainen urging Rome to respect the EU stability and growth pact which Italy would be violating if its deficit should rise back above 3.0 percent of GDP.

EU Commissioner Valdis Dombrovskis said that Italy's debt-to-GDP ratio, the eurozone's second-worst after Greece, needed to be put on a downward trajectory. But the League and M5S appear to be hoping that they can get off the hook by getting the Commission to change the rules that currently apply to deficit calculations.

Concretely, they suggest separating “productive investment” from “current deficits” in the name of “consolidating growth”, instead of lumping them together. More generally, the two parties said they want to revise the entire “framework of economic governance” which they believe is too much based on the “dominance of markets”.

That means there is still plenty of scope for conflict even after the parties dropped radical moves contained in earlier drafts which, besides exiting the euro, also included a demand that the European Central Bank cancel 250 billion euros of Italian debt.

Their current wishlist also includes a vague call for international central bank cooperation, more power for the European Parliament and measures against price dumping within the EU.

By Celine Cornu


Berlusconi’s bad break-up with Putin reveals strained Italy-Russia ties

The chummy relationship between former Italian Prime Minister Silvio Berlusconi and Russian President Vladimir Putin goes back decades. The invasion of Ukraine has put it under pressure.

Berlusconi's bad break-up with Putin reveals strained Italy-Russia ties

After a tycoon bromance, Italy’s Silvio Berlusconi is struggling to break up with Russia’s Vladimir Putin over the Ukraine war — like many in his country, where ties with Moscow run deep.

The billionaire former premier’s unwillingness to speak ill of Putin is echoed by other leading Italian politicians, while in the media, there are concerns that pro-Russian sentiment has warped into propaganda.

Prime Minister Mario Draghi is committed to NATO and the EU, strongly backing sanctions against Moscow, and at his urging a majority of Italy’s MPs approved sending weapons to help Ukraine defend itself.

But much of Draghi’s coalition government — Berlusconi’s Forza Italia, Matteo Salvini’s League and the once anti-establishment Five Star Movement (M5S) — has long pursued a “special relationship” with Moscow.

Italy used to have the largest Communist party in the West, and many businesses invested in the Soviet Union in the 1960s, while Russians in turn sought opportunities here.

Barely a month before the February 24 invasion, Putin spent two hours addressing top Italian executives at a virtual meeting.

Beds, hats, parties

Berlusconi, 85, has been out of office for more than a decade but remains influential both in politics and through his media interests, as founder of the Mediaset empire.

He was an ardent admirer of the Russian leader, and a close chum — they stayed in each other’s holiday homes, skied together and were snapped sporting giant fur hats.

“They were two autocrats who mutually reinforced their image: power, physical prowess, bravado, glitz,” historian and Berlusconi author Antonio Gibelli told AFP.

Putin gave Berlusconi a four-poster bed, in which the Italian had sex with an escort in 2008, according to her tell-all book. He in turn gave Putin, 69, a duvet cover featuring a life-sized image of the two men.

In the months before the Ukraine war, Berlusconi continued to promote his close ties, including a “long and friendly” New Year’s Eve phone call.

It was not until April, two months after Russia’s invasion, that he publicly criticised the conflict, saying he was “disappointed and saddened” by Putin.

He has struggled to stay on message since then.

Speaking off the cuff in Naples last week, he said he thought “Europe should… try to persuade Ukraine to accept Putin’s demands”, before backtracking and issuing a statement in Kyiv’s support.

“Breaking the twinning with Putin costs Berlusconi dearly: he has to give up a part of his image,” Gibelli said.

Meanwhile, the leader of the anti-immigration League, Salvini, who has proudly posed in Putin T-shirts in the past, has argued against sending weapons to aid Ukraine.

The League did condemn Russia’s military aggression, “no ifs and no buts”, on February 24 when Russia invaded.

But an investigation by the L’Espresso magazine earlier this week found that, in the over 600 messages posted by Salvini on social media since Russia invaded, he had not once mentioned Putin by name.

He did so for the first time on Thursday, saying “dialogue” with Putin was good, and encouraging a diplomatic end to the war.

‘Biased media’

Many pro-Russian figures are given significant airtime in the media, which itself is highly politicised.

“Italy is a G7 country with an incredibly biased media landscape,” Francesco Galietti, founder of risk consultancy Policy Sonar, told AFP.

TV talk shows are hugely popular in Italy, and “one of the main formats of information” for much of the public, notes Roberta Carlini, a researcher at the Centre for Media Pluralism and Media Freedom at the European University Institute.

But she warns they often “obscure facts”.

Italy’s state broadcaster RAI is being investigated by a parliamentary security committee for alleged “disinformation”, amid complaints over the frequent presence of Russian guests on talks shows.

Commercial giant Mediaset is also in hot water after airing an interview with Russia’s Foreign Minister Sergei Lavrov in which highly polemical claims went unchallenged.

It defended the interview, saying good journalism meant listening to “even the most controversial and divisive” opinions.

“RAI is a reflection of the political landscape, with its many pro-Russian parties. And Mediaset… well, Berlusconi is an old pal of Putin’s, so what do you expect?” Galietti said.

He also points to a decades-long culture in Italy of allowing conspiracy theories — particularly on the interference of US spies in Italian politics — to circulate in the media unchallenged.

“You end up with a situation where Russia Today (RT) is considered as authoritative as the BBC,” he said.