Monday, April 16, 2018

The Financial Time Bomb That is Italy

Wolfgang M√ľnchau was absolutely correct when he recently wrote:
The eurozone crisis left Italy with only one improbable pathway to put itself on a sustainable footing: permanent fiscal restraint and economic reform (coupled with a prayer that this dream combination from conservative economics would ensure everlasting debt sustainability). Back in the real world, no Italian political parties have promised serious reforms, and the two winning parties in the recent general election, Five Star Movement and the anti-immigrant League, have threatened to unleash the very opposite of fiscal restraint. So if the global economy turns down, it will take Italy with it.

A critical moment to watch is the 2019 budget, which will have to be passed by this autumn. Italy may well have a new government by then. But the political dynamics of the parliament will be more important. Populist parties account for some 60 per cent of Italian MPs and senators. Their priority will not be to follow the fiscal rules of the EU. When governments are weak, parliaments are strong. The majority in the Italian parliament does not look as though it will approve yet another austerity budget...

Unless Five Star or the League agree to self-destruct, they cannot afford to let go of their election promises. Five Star promised a universal basic income; the League wants a flat income tax. Both intend to reverse pension reforms. These promises are simply inconsistent with adherence to the EU’s fiscal rules.

New elections would not solve the problem. They might produce the same result or an even larger share of the vote for extreme parties. There will still be no majority for economic reform and fiscal restraint. In other words: of all the feasible constellations it is hard to see one that offers compliance with the fiscal rules of the EU.
An Italian financial crisis will make the Greek financial crisis look like a squirt gun match. Stay tuned.
-Robert Wenzel  

1 comment:

  1. I told my parents that they should start quietly to take the money out of the bank, but I was not able to convince them.