Salvini was quick to insist that the current coalition will remain intact, but he always says that. Now, that assessment is seemingly contingent on his fiscal agenda being implemented. Tax cuts will be prioritized. Di Maio said on Monday that he supports slashing taxes and is prepared to chat about a flat tax plan with League. It’s good that Di Maio is on board, precisely because it doesn’t matter if he isn’t.
That’s from “Italy Now Belongs To Matteo Salvini“, a post documenting what’s likely next for Italy after League doubled its general election showing by garnering more than 34% of the Italian vote in the EU ballot.
Although Salvini’s plans to lead a pan-European nationalist coalition may have to be shelved in the short-term thanks to a somewhat disappointing showing for populist parties on the whole in the EU vote, any designs he has on consolidating power domestically have the green light.
Generally speaking, League needed a minimum of 30% to deliver what some commentators described as a “knockout blow” to rivals, and the party cleared the bar. Although Salvini quickly declared that the results gave him a mandate to challenge Brussels on fiscal constraints, he rolled out the obligatory nods to keeping the coalition government intact. However, his commitment to that is now contingent on Five Star supporting his tax plan, as noted in the excerpted passage above.
The EU election ballots were barely counted on Monday when both Reuters and Bloomberg reported that Brussels is set to open disciplinary proceedings on June 5 to punish Italy for failing to take concrete steps towards improving its fiscal position. Those reports were subsequently confirmed, there were some perfunctory nods to the desirability of not letting things spiral out of control, a letter was sent and, on Wednesday, Giovanni Tria said he “stands ready to reply.” An Italian Treasury official said the government would respond by May 31.
Salvini met with Tria on Thursday to discuss the situation. “[We had a meeting] on the letter with which we will politely reply with positive numbers which will protect the country from further letters or infringements”, he said, adding that he sees “obvious signs of economy stabilization”. It wasn’t immediately clear what he meant.
But the real story on Thursday is that, while speaking to League lawmakers, Salvini said he was prepared to end the current coalition in the event Five Star decides not to support his tax plan and “other priority measures.”
This should come as no surprise, but Italian assets didn’t like it. BTPs dropped after rallying earlier in the session. Italian equities fell. The euro turned negative (top pane).
You’re reminded that Italian stocks’ relative performance to the Euro Stoxx 50 became disconnected (yellow-shaded oval) with the BTP-bund spread earlier this year. Specifically, the FTSE MIB outperformed even as the spread leaked wider. That anomalous situation has now “corrected” itself. The nefarious “lo spread” has a date with 300bp.
Again, nobody should be even remotely surprised if Salvini pulls the plug on the coalition and sets out to tighten his grip on power. If he doesn’t do it now, he risks a scenario where another budget fight with Brussels puts pressure on Italian assets and/or a worsening of the global macro outlook (i.e., due to the trade war) pushes Italy back into a recession. In the event there’s another egregious selloff in Italian stocks and bonds and/or the Italian economy sinks, it’s at least possible League’s support will wane, weakening Salvini’s hand. That’s one rationale for getting this over with.
As far as markets are concerned, Salvini’s economic policies would arguably be more market-friendly than the current setup where Five Star’s electoral promises have to be incorporated into fiscal policy. On the other hand, Matteo is likely to push things to the brink when it comes to any standoff with Brussels and his social agenda is, well, a bit unpalatable, to put it mildly.
Later, in remarks carried by Ansa, Salvini said “no” when asked about the possibility of early elections in September. “In September we prepare a budget”.
The only question is who “we” is.
Read more: Trump-O-Nomics, Italian Style
Hey, Matteo, why don’t you just start printing lira? Big demand, I hear, for currency backed by the full faith and credit of the Italian government. LOL.