Italy Gets a Taste of Boris Johnson's Cake

(Bloomberg Opinion) -- Italy’s populist dream team has a radical plan to revive the country’s economy. Successive drafts of the coalition agreement between the League and the Five Star Movement, seen over the past few days, show the two parties are keen to press ahead with their lavish tax cuts and spending pledges, in spite of Italy’s mammoth public debt.

There’s a double contradiction at the heart of this program, though. The League and Five Star are asking the rest of the euro zone to help them fund their expensive promises — even though they go against the bloc’s budget rules. And while any such government would face a resounding “No” from its European partners, the populist groups don’t seem prepared to leave the currency union whose rules they so despise.

The initial draft of a government contract between the two parties includes a “citizens’ income” — an income support scheme that would cost about 17 billion euros a year ($20 billion). The two parties expect the EU to contribute up to 20 percent of its European Social Fund to this. A first draft of the document also called on the European Central Bank to cancel 250 billion euros of Italian debt — although the two parties have backtracked on this. They now say they only want accounting changes, permitting all euro-zone states to exclude any debt bought by the ECB from the calculation on whether they’re exceeding borrowing limits.

Still, the paradox is clear: The League and Five Star want the euro zone to help Italy just as Italy steps away from the rules.

It’s very reminiscent of the U.K. after the Brexit vote. Brexiteers wanted to preserve unfettered trade with the EU, while seizing back control of immigration — a position popularized by British foreign secretary Boris Johnson as “having your cake and eating it.” Unsurprisingly, Brussels has left Johnson and his friends to go hungry. Just as there was no EU backing of Brexit Britain’s utopia, there will be no support for Italy’s dreamers.

What will Five Star and the League do then? The only consequential plan of action would be to leave the euro zone. The first draft agreement did include an opt-out of the currency union, which would be enacted if “popular will” demanded it. Yet the two parties changed tack in a later draft, saying that Italy would seek only to change the European Treaties.

Should the two parties stick to this pledge in their final agreement, that may reassure investors. Markets were alarmed by the initial draft leaked to HuffPost Italia.

However, it would also strip most of their promises of any meaning. For example, the euro zone demands that countries reduce their budget deficits during an economic upswing. The League and Five Star want to do the opposite, cutting taxes and lowering the retirement age. They also want to radically reform the “bail-in,” the mechanism where bond investors bear some of the costs of a bank failure. But, once again, that’s set in European law. 

So the new government would look a lot like the anti-establishment administration of another southern European country: Greece. Alexis Tsipras’s Syriza scored a stunning success in the 2015 Greek elections, as he promised to end the years of austerity that accompanied successive rescue programs. But he didn’t follow through when it became clear this would imply leaving the euro. Tsipras had to settle for very minor concessions, hardly comparable to what he’d offered voters.

There are differences, of course. Italy’s public debt is far bigger than Greece’s. A new government in Rome could use that to threaten the rest of the euro zone, as an Italian default would be too big to bear. Unlike Greece, Italy isn’t under an externally monitored economic adjustment program, meaning it “only” needs to convince investors to refinance its debt, not euro-zone partners.

Still, even if they do form a government, the League and Five Star will probably repeat the experience of anti-establishment and euroskeptic forces elsewhere. For all the tub-thumping rhetoric, many of their ideas will probably remain on paper. I still believe that they must be given the chance to rule, given their democratic mandate. But the Italian economy, and possibly that of the euro zone, will suffer the collateral damage from their almost certain failure.

©2018 Bloomberg L.P.

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