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12th Aug 2022

Italian populists to defy EU debt rules

  • Rome: Still unclear who would be PM as populist duo vie for power (Photo: gnuckx)

Italy's would-be populist new rulers plan to pile on debt, posing questions for eurozone stability and monetary union.

They will slash taxes, hike welfare payments, and abolish pension reforms, according to a new draft accord of the 5-Star Movement and League parties seen by the Reuters news agency.

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  • Salvini: "The more they insult us ... the more desire I have to embark on this challenge" (Photo: quirinale.it)

The plan to introduce two flat-rate taxes for businesses and individuals of 15 and 20 percent that would cost up to €80bn in lost revenues. Their "universal income" for the poor would cost €17bn, while scrapping the pension reform would cost another €4bn, economists said.

The draft accord comes after the two populist and eurosceptic parties came top in elections in March.

The 5-Star Movement leader, Luigi Di Maio, and his League counterpart, Matteo Salvini, have not yet agreed who will be the next prime minister, but they aim to submit their programme to president Sergio Mattarella over the weekend.

A previous programme contained references to plans for a euro-exit, spooking Europe.

The latest one does not, but Reuters' revelations saw the yield on Italian bonds go up and the value of the euro go down on Thursday (17 May), as investors scratched their heads on how the country, which already has a mountain of debt, could ever make good on those promises.

The plans would make a mockery of EU rules on fiscal discipline.

"There is a real danger that the new Italian government could, through its irresponsible economic policies, set the stage for the next eurozone crisis," an EU official told Reuters.

But EU rules and crisis fears aside, Italian profligacy is also likely to make Germany even more reluctant on French president Emmanuel Macron's proposals for euro states to pool their wealth in deeper monetary union.

"Trust towards Italy is bound to face heavy tests … even if the two parties will not be able to implement their programme in full," Jan von Gerich, a strategist at Denmarks' Nordea Bank, told Reuters.

Joerg Kraemer, from Germany's Commerzbank, said: "Such an Italian government would appear irresponsible in fiscal policy terms and further reduce the willingness of many voters in the north of the eurozone to support Macron's plans for more redistribution of risks and income".

That irresponsibility was on show on Thursday, when loose comments by the League's economics chief, Claudio Borghi, that Italian bank Monte Paschi would remain in state hands, saw the share value of the lender Monte Paschi fall even further.

The joint programme also called for an end to Italian and EU sanctions on Russia and for a tougher line on keeping out migrants.

"The more they insult us, the more they threaten us, the more they blackmail us, the more desire I have to embark on this challenge," Salvini said, referring to his party's critics in Brussels, Rome, and beyond.

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