Italy to abolish poverty. Or nationalise it.

It’s Giovanni Tria’s 70th birthday tomorrow. His political career might not last that long though.

The Italian government budget proposal is due by midnight tonight. Sort of. The finance minister must submit finance and growth targets.

As the Bank of England’s Mark Carney and the International Monetary Fund’s economists know, you can target whatever you like. What matters is how you plan to get there. And what actually happens in the end.

The Italian budget itself goes to the EU on 15 October, before the Italian parliament is allowed to vote on it by 20 October. Yes, the EU gets first rights.

Those latter two dates are the key, if you ask me. I’m not expecting fireworks just yet. Bloody October will begin in October.
Tria gave a speech last night which resolved none of the concerns about his coming targets and the budget. The gaps between the EU’s demands, Italy’s past agreements with the EU, and the elected parties remain.

Tria just promises to satisfy everyone. He even claims he can pay down Italy’s debt by spending more and taxing less.

On CNBC last week, the headline read, “Italy sends smoke signals to markets that it will play by Europe’s budget rules.” I hate to tell you, but those ain’t smoke signals.

The sub-head continued, “Italy’s economy minister is expected to prevent Italy’s 2016 budget deficit from rising above 1.6 percent of the country’s gross domestic product (GDP).”

Good luck with that. Because Reuters said the actual elected politicians who appointed the academics as prime minister and finance minister “call for 2.4 percent deficit”.

Bloomberg reviewed various cost estimates of the coalition government’s promises and concluded them “to be over 100 billion euros ($116 billion), or more than 5 percent of gross domestic product.” Goldman Sachs estimates a deficit of up to 7.4% of GDP in 2019 if the elected politicians get their way.

And it’s no wonder. The polices are so extraordinary I’m tempted to say they’re worth a try. Just so we don’t make the same mistake again any time soon.

A basic monthly income of up to €780 (just under £700) “will have abolished poverty” said Deputy Prime Minister Luigi Di Maio on state television RAI.

The plan to lower the pension age is another one. I especially loved what Tria said about that according to Reuters: “allowing people to retire earlier would give firms a younger, more skilled workforce.” Yes, this from the guy who turns 70 tomorrow, and who’s being lambasted by populist elected leaders half his age. You’d think he’d say the opposite, like the rest of Europe.

The tax cuts that right-wing coalition partner Lega called for will be phased in too. 2019 will only cut the corporate rate though.

Public investment, whatever that means, will rise to 3% of GDP within three years from about 2% last year.

The budget’s overall ambition is completely overwhelming. It’ll halve the growth gap between Italy and the rest of the EU next year…

Oh. Actually, that sounds rather pitiful to me. Especially given European growth is slowing.

Tria summarised that the budget will increase market confidence in Italy. But I’m not sure how the maths is supposed to work out.

But don’t forget, the real maths won’t be out till mid-October. You can pretend Italy isn’t about to unleash the biggest financial crisis in history for a little longer.
Unless the pressure behind the scenes boils over during the internal negotiations of the Italian government. So far we’ve had rumours of threats to resign, and Reuters reported that on Tuesday the Five Star Movement threatened to vote down the budget.

This week alone, Di Maio said, “We are not going to sacrifice the citizens on the altar of debt.” Ironically enough, that’s exactly what he is going to do, but his meaning is the opposite of mine.
Di Maio’s fellow deputy prime minister Matteo Salvini added, “The 2019 budget must be a courageous, expansive one.” And “If Italy wants to grow, it has to invest.”

The Italian treasury staff disagreed. This week, an audio clip was leaked of Rocco Casalino, a spokesman for the Italian prime minister, airing his views on the budget. He didn’t mince his words: “If, in the end, they tell us “ah, we couldn’t find the money’ then we’ll spend all of 2019 getting rid of all these pieces of s*** in the ministry of finance.”

Casalino then warned that a “mega-vendetta is ready” and that “the knives would come out.”

Two of the four key debt ratings agencies delayed their verdict on Italian debt in August. They specifically said they’re waiting for news on the Italian budget. Casalino may be right the knives are out. But they’re behind him.

The Maoist and the euro

Finance Minister Tria is supposed to be a mild-mannered technocrat. But is he?

At EU meetings, the former Maoist rejected calls for more European integration unless struggling economies get more support. He even did the unthinkable and spoke about the actual matter at hand – the euro. The Financial Times translated:

“Those who invoke an exit from the euro as a panacea are not right,” wrote Mr Tria in Il Sole 24 Ore newspaper in a co-authored article, “but Mario Draghi, the ECB president, is also not right when he says the euro is irreversible, if he does not clarify what the timing and the conditions are for the reforms needed for its survival.

Questioning the euro and demanding the option to leave it is just short of pointing out the emperor has no clothes. Without its own monetary policy and exchange rate, Italy is incredibly exposed to the ills of its incompetent government. No wonder it’s the incompetent government that is demanding a way out.

The Financial Times may be wrong about the timing, but at least it’s on the right track: “should this week not go as smoothly as planned, and Mr Tria’s position comes under threat, then what has been a mild panic about Italy’s finances could develop into a full-blown crisis.”

Until next time,

Nick Hubble
Capital & Conflict

Category: Brexit

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