Di Maio Vows Italy Will Use Tough Tactics in EU Budget Battle

(Bloomberg) -- Italy is ready to repeat the tough tactics it used to win concessions from the European Union on migration when the forthcoming budget battle gets serious, Deputy Prime Minister Luigi Di Maio said.

Italy’s anti-establishment coalition wants enough flexibility to introduce a flat tax and a citizen’s income next year without running foul of EU budget restrictions, Di Maio said in an interview with Bloomberg News Wednesday. He suggested that if the EU changed the way the deficit was calculated then his government’s plans could be implemented without breaching the limit.

“We want to discuss these reforms with the European Union to obtain the margin for maneuver that will allow us to implement those measures,” Di Maio said. “That means doing the same as we did on immigration. There shouldn’t be a clash with the EU, but a frank discussion.”

While Di Maio was reminding the rest of Europe of Italy’s hard-ball tactics over migration at a summit in June, Finance Minister Giovanni Tria and Prime Minister Giuseppe Conte sought to allay concerns about the country’s plans. Conte told reporters in Rome Wednesday that the 2019 budget must be “realistic” and Tria told newspaper Il Sole/24 Ore that the government’s program would be enacted in stages.

La Repubblica reported that Conte told a cabinet meeting late Wednesday that it would take five years to introduce the flat tax and the citizens income. The number of tax brackets would be reduced gradually over time, and the citizens income requires a reorganization of Italy’s job centers to assure that recipients are out of work and looking for jobs.

Coalition Tensions

After March’s election left parliament deadlocked between Di Maio’s Five Star and Matteo Salvini’s League, Conte and Tria were recruited from academia to arbitrate between the two populist groups. They have sought to build bridges between officials in Brussels and their political partners while Salvini says that EU deficit rules “aren’t the Bible.”

Italy’s 10-year bonds rose Thursday morning, sending the yield two basis points lower to 2.90 percent. Yields jumped during the previous session following Di Maio’s comments.

The coalition has already had one major clash with the EU and reckons it came out a winner.

In the run-up to an EU summit in June, Salvini provoked a diplomatic incident by turning away a rescue ship with more than 600 people aboard, then swapped insults with French President Emmanuel Macron. At the summit in Brussels, Prime Minister Giuseppe Conte threatened to block all the other business leaders were aiming to complete.

Spain agreed to take the ship turned away by Salvini, and ultimately member states agreed to increase border security, set up holding centers to handle asylum seekers, and to impose tighter controls on the charity organizations rescuing people from the Mediterranean Sea. An Italian official said Conte got about 70 percent of what he’d wanted.

Lack of help from the rest of Europe in coping with the roughly 300,000 migrants that have arrived on Italian shores since the start of 2016 was a major factor in the defeat of establishment parties in the March 4 election.

Budget Battle

Now the administration is turning its attention to how to deliver on its election promises. With 2.3 trillion euros ($2.7 trillion) of public debt, the most in Europe, Finance Minister Giovanni Tria has said the government program won’t jeopardize Italy’s commitment to reduce its debt burden.

Di Maio’s Five Star Movement ran its campaign on promises to introduce a citizens’ income for poorer Italians and Salvini’s League wants to introduce a flat tax. Both want to roll back recent increases in the retirement age. Those plans may cost as much as 120 billion euros in the first full year, according to calculations by Carlo Cottarelli, a former International Monetary Fund executive. The ruling parties have questioned that estimate, without providing further details of how they are going to fund the measures.

According to newspaper Il Messaggero, the government is also looking at reducing tax breaks for diesel, transport fuel, and fertilizers. The state already faces a widening budget deficit because of slowing economic growth and higher interest rates, even before accounting for Salvini and Di Maio’s campaign promises.

Creative Solutions

One potential approach could involve excluding some spending from the deficit calculations.

“It is possible to introduce both this measure and a flat tax and to respect European Union deficit limits, because this is a structural reform for Italy,” Di Maio said. “The European Union must listen to us in this phase when we want to protect citizens facing a social emergency.”

Di Maio said markets shouldn’t fear the government’s policies, because they are aimed at boosting economic growth.

“When investors learn about our intentions to invest in infrastructure, in the real economy, investors will see we are not people who want to destroy everything,” he said.

©2018 Bloomberg L.P.