Italy’s 5-Star/League coalition seeks a 2.4% budget deficit including a guaranteed income provision. Brussels bristles.

Italy Seeks to Abolish Poverty

The BBC reports Italy’s Populists Agree Budget to ‘Abolish Poverty’.

The ruling Five Star and League parties said late on Thursday that they had agreed to set the budget deficit at 2.4% of GDP. They will press ahead with a minimum income for the unemployed.

League leader Matteo Salvini has questioned why Italy should be shackled by European limits, hampering what he sees as vital reform projects.

Election Promises

Free Money, Free Gas, Free Everything

Free money and lower retirement ages. What can possibly go wrong?

Well, maybe someone just may wish to look at every other time in history such a move has been tried.

Venezuela’s free gasoline project comes to mind.

Italy 10-Year Bond Yield

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Bond Spread to Germany

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Italy’s Fiscal Defiance – Eurointelligence

The Italian cabinet has confirmed the political agreement reached a day earlier to increase the budget deficit to 2.4% – instead of the 1.9% envisaged by [economy minister] Giovanni Tria. That was already way above the trajectory set by the EU. The previous government had penciled in a fall in the deficit to about 0.8-0.9% – another good example of the absurdity of long-term fiscal projections.

The decision means that Italy is now in open defiance on EU budget rules. There will be a spat with the European Commission, but we doubt very much that this issue will turn into a life-or-death confrontation just yet. This expectation seems to be shared by the markets – which nevertheless drove up the Italian 10-year spread to 250bp at some point yesterday. We doubt that the European Commission will want to risk a confrontation that would end driving even more voters to support the Lega and Five Star at next year’s European elections.

The change of target means that Italy will almost certainly fail to reach the goal of a falling debt-to-GDP ratio, which has become Italy‘s new self-imposed fiscal rule – anything is ok for so long as debt-to-GDP is falling.

These concerns will undoubtedly resurface at one point – we believe the crunch time will come after the elections. In the meantime, we repeat our previous assertion that the policies of this government are not consistent with Italian membership of the eurozone. This is not so much meant as a forecast of a breakup – merely observing an unsustainable position.

The discourse in Italy is nowadays not about debt sustainability, but about how much deficit you can get away with under EU fiscal rules. We would add that this thinking is not confined to the populists.