Italy’s Populists Rewrite a Comic Masterpiece

(Bloomberg Opinion) -- Pantomimes aren’t a Christmas tradition in Italy; they’re more of a British thing. But Rome’s government has nonetheless decided to put on a surreal piece of theater ahead of the festivities this year. The plot is a modern twist of “Servant of Two Masters,” a comic masterpiece by the Venetian playwright Carlo Goldoni.

In Goldoni’s play, the protagonist Truffaldino charges around Venice trying to satisfy the needs of two bosses. Rome’s modern version has Prime Minister Giuseppe Conte shuttling back and forth to Brussels in an attempt to satisfy the often conflicting demands of his two political masters: the Five Star leader Luigi Di Maio and the League’s Matteo Salvini.

The play would be quite funny if it wasn’t putting savings and jobs at risk. Italy has to pass its 2019 budget by the end of the year, but its first iteration — including a 2.4 percent deficit target — has been rejected by the European Commission. This week has at least seen an indication from Salvini and Di Maio, whose populist parties run the country’s coalition government, that they may give some ground.

But it’s still hard to tell how serious the two men are. With bond investors looking for signs of whether they’re genuine about cutting back some irresponsible giveaways, including a lowering of the pension age, it’s time for the play-acting to stop and for Salvini and Di Maio to start reading from the same script. Rome needs to offer a credible plan of concessions, scrapping those measures which add to the deficit without boosting growth much. The Commission could then shelve its “excessive deficit procedure,” the mechanism by which it punishes countries that exceed fiscal targets.

Conte met with the Commission President Jean-Claude Juncker over dinner on Saturday, along with Giovanni Tria, Italy’s finance minister, and commissioners Pierre Moscovici and Valdis Dombrovskis. But it’s only Di Maio and Salvini who really matter here. Since his Brussels meeting, Conte has gathered the League and Five Star leaders together in an attempt to cook up a plan that will appease the Commission, leading to the slight opening to the idea of revising down the 2019 deficit target to maybe 2.2 percent. Financial markets jumped at the news: Italy’s bond yields rallied on Monday, with the spread over Germany’s 10-year bund narrowing to about 290 basis points.

This change of tone is certainly welcome. Salvini has asked repeatedly for greater respect of Italy, only to make personal attacks on Juncker. Not the best way to wring concessions. Italy’s recent struggles with debt issuance may have concentrated populist minds. Last week, Rome had a disastrous auction of bonds aimed largely at retail investors, showing even Italians are worried about lending money to the state. 

The trouble is that Rome’s offer appears to be a mixed bag of half-concessions that don’t add up to much. The populists may be prepared to cut the money allocated to their flagship measures, a lowering of the pension age and an income support scheme. But for now this reduction seems to be in the region of 3-4 billion euros ($3.4 billion-$4.5 billion). And it would perhaps merely be reallocated to other measures.

Crucially, Salvini and Di Maio might be happy to cut the other’s preferred promises, but not their own. Even more important, the savings may simply be achieved by delaying the introduction of measures. This would reduce the cash disbursements for 2019, but would just shift the problem to later years.

If they really want to appease the markets and their European partners, the populists need to go further. The best way would be for each to scrap much of their flagship reforms on the pension age and income support. As designed, they’ll do little to boost employment. Taking the shears to them would bring the budget deficit below 2 percent. The markets would approve, helping avoid the risk of a credit crunch. It would make the 2019 deficit forecast marginally more credible.

Of course, the two leaders may well be convinced that their economic strategy remains correct. After all, they won impressive electoral support in March. In that case, they should spare the rest of Europe from this week’s “will they, won’t they” performance and simply steam ahead with their plans. If Italy really were to grow by 1.5 percent next year thanks to their policies, as the government has forecast, it would be hard for the rest of the euro zone to complain. Same for the markets. 

That outcome is, of course, highly unrealistic. So one has to hope that the populists see sense at last. If they don’t, they shouldn’t hide behind Conte. Salvini and Di Maio must take full responsibility for their own stage direction.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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