Financial markets wary of far-right election win in Italy

Giorgia Meloni’s plans to increase public spending and further deepen Italy's debt are causing concern in financial markets and in Brussels.

Giorgia Meloni, the leader of Italian party Brothers of Italy, at an election rally.
The leader of far-right Brothers of Italy, Giorgia Meloni, looks set to win Sunday’s elections but her plans to increase public spending are already unnerving financial markets. Photo by Andreas SOLARO / AFP

From her euroscepticism to her impact on Italy’s enormous debt, the likely victory of far-right leader Giorgia Meloni in elections Sunday is unsettling international rating agencies.

The Brothers of Italy leader has abandoned her calls for the country to leave the EU’s single currency and the joint programme with her right-wing allies – the anti-immigration League and Silvio Berlusconi’s Forza Italia – commits them to the European project.

READ ALSO: Is Brothers of Italy a ‘far right’ party?

But concerns persist, particularly after she reiterated her support this week for Hungarian Prime Minister Viktor Orban in his battles with Brussels.

At an election rally in mid-September in Milan, Meloni declared that “the good times are over” and that Italy, like others, “is going to start defending its own national interests” in the EU.

Matteo Salvini, Silvio Berlusconi and Giorgia Meloni at an election rally.

Meloni’s right-wing coalition includes Matteo Salvini’s anti-immigrant League and Forza Italia, led by former premier Silvio Berlusconi. Photo by Andreas SOLARO / AFP

“I don’t know any nationalists who are not against European institutions,” Frans Timmermans, vice-president of the European Commission, noted in an interview with La Repubblica newspaper earlier this month.

EU recovery plan

Well placed to become the next prime minister, Meloni wants a “confederate Europe” which “respects the sovereignty of member states” to manage their own affairs.

READ ALSO: Italy’s right confident of election win at last rallies before vote

She has called for a renegotiation of the Italian part of the EU’s mammoth post-pandemic recovery plan, from which Italy stands to receive almost 200 billion euros, to account for the spike in energy prices linked to the Ukraine war.

But the money is dependent on a series of reforms, which outgoing Prime Minister Mario Draghi began but must still be implemented.

“We could end up with a serious clash of ideas between Italy, which is by far the biggest beneficiary of the recovery plan, and the EU,” noted Nicola Nobile of Oxford Economics, a consultancy.

“There are many risks, but it will all depend on which Meloni leads the government – the one who has attacked Europe in the past or the one who now advocates a more moderate approach and could pursue the status quo on fiscal matters,” she told AFP.

Spiralling debt

Concerns about a slip in the reform timetable and an increase in Italy’s debt after the elections have already caused rating agencies Standard & Poor’s and Moody’s to downgrade the outlook for the country’s credit rating.

Lega leader Matteo Salvini delivers a speech at an election rally.

Matteo Salvini, leader of the League, is one of the staunchest supporters of the so-called ‘flat tax’, which could cost Italy between 20 and 58 billion euros. Photo by Andreas SOLARO / AFP

Italy is saddled with a debt of more than 2.7 trillion euros, or some 150 percent of gross domestic product (GDP), the highest ratio in the eurozone after Greece.

Meloni’s right-wing coalition is calling for a revision of the EU’s rules against overspending, which were suspended during the pandemic but set a ceiling of three percent of GDP for the deficit and 60 percent for debt.

READ ALSO: Salvini vs Meloni: Can Italy’s far-right rivals put differences aside?

While some flexibility might be allowed, “it would be political suicide to say, ‘we don’t care about all the rules’,” noted Peter Bofinger, professor of economy at the University of Wuerzburg.

“If Italy deviates from the European consensus” and does not maintain a minimum of budgetary discipline, “not even the European Central Bank will be able to help it”, he told AFP.

Costly election promises

The right-wing coalition has promised to cut taxes while increasing spending, including raising the minimum pension – plans that risk being hugely expensive.

“Their programme is very vague and does not explain how to finance these measures,” said Nobile.

“If they were implemented, Italy’s public deficit would remain above six percent of GDP for five years from 2023,” pushing the already high public debt to “unsustainable levels”.

READ ALSO: Giorgia Meloni’s party will likely win the elections – but will it last?

The coalition’s flagship measure, a so-called flat tax that the League wants to set at 15 percent and Berlusconi at 23 percent, could cost between 20 billion and 58 billion euros, according to Italy’s public accounts observatory.

Investors fear the government could end up like its predecessors – Berlusconi resigned in 2011, under pressure from the markets and a surge in the cost of debt.

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What does the shut-off of Russian gas supplies mean for Italy?

After Russian energy giant Gazprom suspended gas deliveries to Italy on Saturday, many are wondering what consequences the stoppage will have on the country’s energy supplies.

What does the shut-off of Russian gas supplies mean for Italy?

What’s going on?

Over the past three days, Italy has received none of the gas supplies it expected from Russian energy giant Gazprom. 

The impasse officially started last Saturday, when Gazprom announced it would not be able to deliver gas to Italy due to “the impossibility of gas transport through Austria” – Russian gas supplies are delivered to Italy through the Trans Austria Gas pipeline (TAG), which reaches into Italian territory near Tarvisio, Friuli Venezia-Giulia. 

READ ALSO: Russia suspends gas to Italy after ‘problem’ in Austria

Though Gazprom originally attributed the problem to Austrian gas grid operators refusing to confirm “transport nominations”, Austria’s energy regulator E-Control said that the Russian energy mammoth had failed to comply with new contractual agreements whose introduction had been “known to all market actors for months”. 

Additional information about the incident only emerged on Monday, when Claudio Descalzi, the CEO of Italy’s national energy provider ENI, said that supplies had been suspended after Gazprom failed to pay a 20-million-euro guarantee to Austrian gas carrier Gas Connect. 

Descalzi also added that ENI was ready to step in and deposit the guarantee itself in order to unblock deliveries to Italy.

Logo of Italian energy regulator ENI.

Italian energy regulator ENI said it was ready to pay Austrian gas carriers a 20-million-euro guarantee to unblock deliveries. Photo by Marco BERTORELLO / AFP

READ ALSO: Italy’s ENI ready to pay guarantee to unblock Russian gas

At the time of writing, however, no agreement between ENI, Gas Connect and Gazprom has yet been reached, with the stoppage expected to continue until Wednesday at the very least.

What would an indefinite stoppage mean for Italy’s upcoming winter season?

Though energy giant ENI appears to be confident that a compromise between all the involved parties will be reached shortly, the “indefinite shutdown” of the Nord Stream 1 pipeline in early September is somewhat of a menacing precedent. 

After fears of a long-term supply suspension cropped up over the weekend, outgoing Ecological Transition Minister Roberto Cingolani publicly reassured Italians that “barring any catastrophic events, Italy will have the whole of winter covered”.

It isn’t yet clear what exactly Cingolani meant by “catastrophic”, but the latest available data seem to suggest that Italy wouldn’t have to resort to emergency measures, chiefly gas rationing, should Gazprom halt deliveries indefinitely. 

Italian Minister for Ecological Transition Roberto Cingolani.

Outgoing Minister for Ecological Transition Roberto Cingolani said that, “barring any catastrophic events”, Italy will have enough gas supplies for the winter. Photo by Andreas SOLARO / AFP

In 2021, prior to Russia’s invasion of Ukraine, Italy received around 20 billion cubic metres of Russian gas per year, which accounted for about 40 percent of the country’s annual gas imports. 

But, thanks to the supply diversification strategy carried out by outgoing PM Mario Draghi and his cabinet over the past few months, Russian gas currently accounts for, in the words of ENI’s CEO Claudio Descalzi, only “about nine to 10 percent” of Italian gas imports.

READ ALSO: Italy’s Draghi criticises Germany over latest energy plan

Granted, Italy still receives (or, given the current diplomatic deadlock, expects to receive) a non-negligible total of 20 million cubic metres of Russian gas per day. But, should supply lines between Rome and Moscow be shut off until further notice, Italy could fall back on existing gas stocks to meet winter consumption demands. 

Last Wednesday, Cingolani announced that the country had already filled up 90 percent of its national gas stocks – Italy has nine storage plants for an overall storage capacity of 17 billion cubic metres of gas – and the government was now working to bring that number up by an additional two or three percentage points.

These supplies, Cingolani said, are set to give Italy “greater flexibility” with respect to potential “spikes in winter consumption”.

Gas storage station in Loenhout, Belgium.

Italy has nine storage plants for an overall storage capacity of 17 billion cubic metres of gas. Photo by Kenzo TRIBOUILLARD / AFP

Finally, Italy is expected to receive an additional four billion cubic metres of gas from North Europe over the winter months – deliveries which will be complemented by the first shipments of LNG (Liquefied Natural Gas) from Egypt.

Both of these developments are expected to further reinforce Italy’s position in the energy market for the cold season.

What about the long-term consequences of an indefinite stoppage?

An indefinite shut-off of Russian gas supplies would effectively anticipate Italy’s independence from Moscow by nearly two years – Draghi’s plan has always been to wean the country off Russian gas by autumn 2024.

However, the Italian government’s strategy is (or, perhaps, was, as a new government is about to be formed) centred around a gradual phasing out of Russian supplies. As such, although not immediately problematic, a ‘cold-turkey’ scenario might create supply issues for Italy at some point during 2023.

READ ALSO: EXPLAINED: How much are energy prices rising in Italy this autumn?

Granted, Algeria, whose supplies currently make up 36 percent of Italy’s national demand, is expected to ramp up gas exports and provide Rome with nine billion cubic metres of gas in 2023.

But, even when combined with LNG supplies from several African partners – these should add up to a total of four billion cubic metres of gas in 2023 – there’s a risk that Algerian gas might not be able to replace Russian gas on its own.

An employee works at the Tunisian Sergaz company, that controls the Tunisian segment of the Trans-Mediterranean (Transmed) pipeline, through which natural gas flows from Algeria to Italy.

Algerian gas supplies, which reach Italy through the Trans-Med pipeline (pictured above), might not be enough to replace Russian gas in 2023. Photo by Fethi BELAID / AFP

Therefore, should an indefinite shut-off be the ultimate outcome of the current diplomatic incident between ENI, Austria’s Gas Connect and Russia’s Gazprom, Italy, this time in the person of new PM Giorgia Meloni, might have to close deals with other suppliers or ask existing suppliers to ramp up production.