Budgeting for populism amid EU hypocrisy

Brussels, you may recall, already vetoed Italy's first choice as finance minister -- a eurosceptic whose views were regarded as heretical. As the finance minister that Italy had to concede to Brussels calculates this year's budget, the Eurocrats are already up in arms. Does national democracy count for nothing?

Giovanni Tria, Italy's Finance Minister
Tim Hedges
On 5 October 2018 13:08

It is budget time in Italy, when for months the press is traditionally full of stories as to who is going to get a bit of a sub, who is going to be left out and, occasionally, what it is all going to cost.

This time things are a little different, with two parties each offering a different, radical and expensive programme combined into a government. Rather than a number of vested interests vying against each other and the Prime Minister as the arbiter, there are two deputy prime ministers in charge. The referee in the game is the finance minister Giovanni Tria.

You may remember that Tria got the job because President Mattarella vetoed Paolo Savona, a eurosceptic, almost certainly on orders from Berlin. Tria, 70, is an academic economist with no roots in either political party. It was thought at first that he would stand firm against an expansion of the deficit, but he was unlikely to hold out against both Mr. Di Maio and Mr. Salvini and has given in at a deficit of 2.4%

This means Salvini and Di Maio are blowing something of the order of €16 billion - a fair old sum under the circumstances - and the news has caused outrage from the European Union to the Financial Times.

The idea had been that the Italian deficit would shrink from 1.6% to 0.8% and thence to a surplus, when the country would start paying down its huge debt.

The Financial Times, where the editorial policy these days is that anything against Europe is akin to heresy in sixteenth century Spain, went off the rails with outrage. ‘Italy’s political leaders are playing a dangerous game’ thunders an editorial.

The FT quotes Pierre Moscovici ‘Public expenditure can make you popular in the short-term, but in the end you have to be honest about who pays’. Mr. Moscovici is, of course, French, and France is coming in with a 2.8% deficit, not, it must be mentioned, for the first time.

In my view this lecturing will be seen as staggering hypocrisy. It will misfire, and make us wonder how awful Italy’s deficit, 0.4% lower than that of France, really is.

The arbitrary European Commission limit for a deficit is 3%. There is no science in this, they just pulled a number out of thin air. The first country to exceed it was Germany. France has breached the limit regularly.

The European Central Bank has announced it is winding down its quantitative easing programme, and economists have been wondering whether Italy would suffer without some pump priming. Now it has arrived, everyone is horrified. And Di Maio’s Citizen’s Income is very efficient pump priming. Whereas the ECB’s bond buying tended to get lost in the banks’ balance sheets, this is money going directly to the citizens to spend.

And what would happen if Italy continued on its German imposed deflation? If the EU are worried about the current crop of ‘populists’ they should see what they get if there are people actually starving. Already the southern half of the country is effectively economically inactive. Further deflation would exacerbate the differences with the rest of the continent.

Yes, the markets are jittery, but for the moment, Italy is borrowing at about the same rate, 3% for ten year money, as the United States.

For myself, I would favour more of a business stimulus than the consumer boost proposed, and I question whether, given Italy’s peculiarities, this money might not end up in the hands of the wrong people, but at least it is a plan.

The EU should back off. Now is not the time to tell the Italians they must suffer more than the French: they are fed up with the EU as it is. A period of silence, particularly from France, would be appropriate here. If Di Maio and Salvini, the people’s choices, are going to screw up, let them.

It is their country, after all. Isn’t it?

Tim Hedges, The Commentator's Italy Correspondent, had a career in corporate finance before moving to Rome where he works as a freelancewriter, novelist, and farmer. You can read more of his articles about Italy here

blog comments powered by Disqus