Italy Wants to Roll the Dice on the Euro All Over Again
Italy Wants to Roll the Dice on the Euro All Over Again
(Bloomberg) -- Four days after his triumph in last month’s European elections, Matteo Salvini strode into the Italian Treasury with his most senior advisers and told Finance Minister Giovanni Tria that from now on he was going to be more involved in economic policy.
The 46-year-old deputy prime minister explained to Tria that he had a new sense of responsibility for the Treasury’s work after his pro-business League’s election victory, according to officials with knowledge of the exchange. As a signal of intent, he demanded to see the defense of Italian budget policy that Tria’s team was preparing for the European Commission.
It’s not just the League’s coalition partners in the Five Star Movement who’ve felt the impact. Officials in Brussels have noticed Salvini’s renewed assertiveness.
As European Union leaders struggle this week to find a candidate to lead its executive arm, Salvini showed he was very happy to stir the pot and throw his weight about. “I told the prime minister that the president of the commission cannot be a communist, a socialist or a left-winger. Are we going to put a Socialist in charge of the commission to do Mrs Merkel a favor?” he blasted to supporters at one of his round-the-clock rallies.
It was the umpteenth warning to the rest of Europe of just how difficult Italy could become if pushed too hard over its finances. In Salvini’s world view, Italy has leverage and wants to start using it.
But its financial problems remain: After a decade of crisis and catharsis set most of southern Europe on a sustainable financial track inside the euro, Italy’s debt—at 132% of GDP—is what keeps policy makers up at night. On Monday night, the government lowered its 2019 budget deficit to avoid sanctions.
Salvini and his allies in the nationalist League have long disavowed their talk of pulling Italy out of the euro. But they still have the potential to bring down the currency union if their budget plans spin out of control.
So the commission issued an ultimatum to Rome: narrow the deficit or face a potential fine of up to 9 billion euros ($10 billion).
Salvini is ready to call its bluff. He argues that the 15 billion-euro tax cut he’s got planned will jolt the economy back to life and set the country and its finances on the right track.
In Brussels, the fear is that without action to make the labor market more flexible and companies more competitive the country is more likely to remain in the doldrums with its debt spiraling ever higher.
But nor do they have much appetite for another fight, with the commission battle still to be resolved. The meeting on Tuesday to address Italy’s finances was pushed back as a special summit to decide the EU’s top jobs drags on for a third day, yet another example of how most things in Brussels are intertwined.
Markets, so far, have given Salvini a free pass.
Yields on 10-year bonds have fallen below 2% to the lowest level since the populist coalition took power with the European Central Bank preparing to deliver more stimulus and the commission backing off. “The EU is not about to send in its tanks just yet,” said Ciaran O'Hagan, head of European rates strategy at Societe Generale.
The anti-immigrant, pro-business firebrand is ready to take advantage of that hesitation.
The second phase of Italy’s populist coalition began in earnest on May 29 when Salvini gathered lawmakers for a private meeting in the lower house in Rome to reflect on the EU vote three days earlier.
Deputies and senators listened attentively with regular bursts of applause as Salvini boasted that he’d received messages from Israel’s Benjamin Netanyahu and Hungary’s Viktor Orban as well as politicians in Washington, Moscow, Buenos Aires, according to two people who were there.
Italy is now center-stage, Salvini said, and so is the League.
Salvini told his audience that he wanted to keep the coalition going to push through his tax plans and warned that the battle with the EU would be brutal. To achieve that, he urged his lawmakers not to add to the coalition partner’s humiliation.
Don’t rock the boat, he told his troops, keep your public statements to a minimum, don’t talk about the Five Star Movement’s troubles.
Italian media speculates endlessly on when Salvini will make a power grab, pull the plug on the government and force an early election. Indeed, that is the million dollar question— and polls on Monday showed his League party would get 38% of the vote if new elections were held. That’s within shooting distance of 40%, a threshold analysts say might be enough to secure majority in parliament without seeking allies. But for now Salvini is staying in a marriage of convenience where he is calling the shots.
The new power dynamic was on display at the national day celebrations held two days later in the ornate gardens of the presidential Quirinale Palace. In 2018, Five Star leader Luigi Di Maio had been the star guest after his victory in the general elections.
This year he went largely ignored as Salvini and his girlfriend stood a couple of palm trees away, holding hands and posing for selfies with the Italian establishment. In deference to the setting, Salvini had swapped his trademark police jacket for a suit and tie.
The two deputy premiers hadn’t spoken for weeks and had swapped insults during a bruising campaign. Salvini was still sore when first told that 32-year-old Di Maio was nearby. But his political instincts soon kicked in.
The League leader walked over and clasped his rival’s hand, sharing the spotlight as photographers snapped away. “We’ll talk,” he said, as the two men parted.
Indeed, the remaining resistance to Salvini in Italy comes not from his coalition partners, or the opposition Democratic Party, but from President Sergio Mattarella, Prime Minister Giuseppe Conte and Tria, the finance chief.
Neither Conte nor Tria have their own political base, but their institutional power means they are in a position to put a brake on Salvini’s maneuvers. Mattarella insisted on their appointments before he agreed to the populist coalition.
Tria’s handling of Salvini’s demands was typical of their tactics.
After his post-election visit to the Treasury, the League leader put out a statement saying he and Tria had agreed on “the need for a COMMON stand” towards the EU.
The maneuver left Five Star marginalized. But Salvini never did get a preview of that letter to the commission, despite Tria’s promises.
The former professor of economics has also pushed back against Salvini’s bid to name the next governor of the Bank of Italy and to use small denomination-Treasury bills to pay creditors and suppliers—a move designed to short-circuit budget rules that has set alarm bells ringing in Brussels and at the European Central Bank in Frankfurt.
Conte too has grown increasingly vocal during his time in government and publicly threatened to quit this month unless Salvini toned down his politicking.
Like Tria, the premier uses attrition warfare to block or stall Salvini. He refuses to let himself be bulldozed by his deputy’s muscular style, one adviser said, and draws on his legal experience to force him into concessions, outlasting him in late-night meetings.
Salvini has deliberately sought to insert himself into conversations between the three establishment figures to assert himself, said a senior League lawmaker.
The establishment figures in Rome and Brussels have been liaising for a year in an effort to head off Salvini’s more radical instincts and they may yet manage to constrain him.
If the commission does start a disciplinary procedure against Italy, the strain could break the alliance between the League and Five Star, especially if borrowing costs start to rise.
But even if the commission pulls its punches for the second time in a year, the pressure is still set to mount on Salvini.
The government’s budget projections for next year are more than 40 billion euros short of what the EU is demanding, setting up another clash for the fall, and the EU elections failed to produce a majority for changing the rules.
Indeed, the next president of the commission may not share Jean-Claude Juncker’s flexible approach to budget rules and the next ECB chief may not be as comfortable with the monetary easing that has kept Italy’s borrowing costs in check through years of crisis and conflict.
Salvini has defeated Five Star. But tougher battles lie ahead.
--With assistance from John Ainger, Viktoria Dendrinou, Alessandro Speciale and Lorenzo Totaro.
To contact the editor responsible for this story: Ben Sills at bsills@bloomberg.net, Flavia Krause-Jackson
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