Apparently, Italy’s populists are going with some version of “if you don’t placate us, they’ll be more of us” when it comes to betting that Brussels isn’t going to crack down on Rome in the event there are no concessions in the budget standoff.
Italy has until tomorrow to figure out how to respond to the E.U.’s demands and unfortunately, Salvini and Di Maio sound even less rational than usual, assuming that’s possible.
“The only way to respect EU parameters is to make a suicidal budget law that would bring on a recession,” Ansa quotes Di Maio as saying on Monday. That comes hot on the heels of his contention over the weekend that by demanding Italy comply with the bloc’s budget rules, Brussels is “ask[ing] Italy to massacre Italians.”
For his part, Salvini on Sunday repeated his threat to block EU budgets in the event Europe persists in “mocking Italians”, and by that he means not taking in every migrant who shows up on his doorstep so he doesn’t have to.
Early Monday, Ansa said Italian Prime Minister Giuseppe Conte would meet with Di Maio and Salvini to chat about the budget, but those reports were later denied.
Over the weekend, separate reports suggested Giovanni Tria (who is some semblance of rational), is pondering a cut to Italy’s 2019 GDP forecast in a last ditch effort to satisfy Brussels.
As far as what European officials can do in the event Italy decides to remain recalcitrant, they can fine Italy up to 0.2% of the country’s annual GDP and if they really want to push the issue, they can ratchet that up to 0.7% if Di Maio and Salvini won’t shut up.
The problem with that – besides the fact that it’s never been done before and thus has the potential to spook markets – is that Italy’s populists would doubtlessly use that as ammunition to embolden other populists across Europe at a time when the EU is desperately trying to avoid a scenario where populism and nationalism spread any further. Over the weekend, Emmanuel Macron issued a scathing critique of nationalism in Paris on Armistice Day.
Early last month, Di Maio insisted that next year’s European Parliamentary elections are going to be an “earthquake” for proponents of austerity. Around the same time, Salvini appeared at a live event with Marine Le Pen, where the two took turns lambasting the EU. “We are against the enemies of Europe — Juncker and Moscovici — shut away in the Brussels bunker”, Salvini said.
Basically, Salvini and Di Maio appear to be betting that the EU won’t dare fine them or otherwise crack down ahead of elections for fear of emboldening the populist cause across the bloc. Even if that strategy proves to be effective, it’s inherently absurd. Something like this: “If you think we’re morons, just wait until you see what you get if you fine us!” Or: “If you strike me down, I shall become even more irrational than you can possibly imagine.”
“While a rejection of the Italian budget has been largely discounted by markets, the eventual opening of an Excessive Deficit Procedure could further unsettle sentiment”, Barclays wrote last week. “We do not expect Italy to escalate fully-fledged anti-EU rhetoric [but] will try to strike a fine balance between the need to maintain an electorally rewarding confrontational stance with EU institutions ahead of European elections of next year and avoiding outright confrontation with the EU that could result in rising market pressures on sovereign funding costs”, the bank continues, before noting that from the EU’s perspective, “an aggressive move towards fast-tracking sanctions against Italy could bolster Italian government anti-EU rhetoric ahead of the EP elections in May 2019.”
Whatever the case, this is weighing on the euro. The single currency hit a 16-month low on Monday.
Italian financials are down a third day and have fallen in all but a handful of sessions since the budget drama kicked into overdrive late in September. The FTSE Italia All-Share Banks Sector index is off its October lows, but just barely, and is still down more than 36% from late April.
This isn’t going to end well for Italy.
One final thing to note about the populists’ “strategy” here is that it would probably take six months for the EU to move ahead with actual punitive measures anyway. So theoretically, Europe could get the ball rolling on that without actually implementing the fines until after the May elections are out of the way.