Italy : towards a political government
Pressure from the President of the Republic to form a technocratic government after two exploratory mandates and further inconclusive consultations has prompted the centre-right and the M5S party to reach a governing agreement. This agreement paves the way for a government consisting of M5S and the League, with Forza Italia providing external support via abstention. M5S and the League together have a majority, but Forza Italia’s agreement is needed to preserve the centre-right coalition, which already governs at the local level. Silvio Berlusconi, who was initially opposed to this solution, has gradually come to terms with it for fear of an early return to the polls. The latest polls, as well as the results of the regional election in Friuli, showed clear gains for the League, while Forza Italia lost ground. Many of Forza Italia’s members of parliament do not want to risk losing their seats for an outcome that would, in any event, result in this government but with the League further strengthened by the vote and able to more effectively impose its will on its coalition partner. Reaching this governing agreement has required M5S to make a number of concessions, notably on the possibility of providing guarantees to Berlusconi regarding the law on conflicts of interest, one of the fundamental proposals put forward by M5S.
Both parties have also given ground on other aspects of the programme, both to restore a degree of realism and to reconcile their highly divergent starting positions. An example is tax reform, where the proposal is now for a pragmatic combination of the League’s initial proposal (a flat tax at 15%) and M5S’s desire to maintain a progressive system. For the time being, details of the proposed reform are only available for personal income tax, which would move from a five-tranche system (with a tax rate of between 23% and 43%) to a two-rate scale (15% for incomes below €80,000 and 20% for those above) but with a system of deductions based on a number of income brackets. As regards reform of corporate income tax, the rumoured withdrawal of subsidies totalling €16 billion would create room for manoeuvre to lower the rate. As for the proposed universal income, M5S has had to substantially water down its original proposal, which faced both obvious funding constraints and the League’s opposition to so-called “assistantship” policies. The compromise, called “independence income”, is based on the model already in place in the Lombardy region (which provides income of €1,800 a year for households with children, an unemployed or elderly household member and income below the poverty threshold). This system would be accompanied by a training programme and reform of Italy’s job centres.
Differences remain over budgetary issues: M5S appears to have accepted the constraint of a sub-3% deficit as well as a primary balance of over 1.5%, whereas the League assumes these constraints will not be met. However, both political forces seem to want to embrace a strategy of cooperative dialogue with EU institutions and other Member States. The President of the Republic – who, as guarantor of the Constitution, has a say in the appointment of the Prime Minister and the Council of Ministers – will be particularly attentive to this point. With a particularly close eye on candidates for the Ministries of the Economy and Foreign Affairs, he will be counting on ensuring that the newly formed government complies with Article 81 of the Constitution, which provides for a balanced budget, and Article 117, which provides for the exercise of sovereignty in accordance with Community and international treaties. Proposals for tax reform and social benefits seem to be heading in the direction of a 2019 budget in line with European rules. On the foreign policy front, differences remain, with M5S having moved back to a pro-NATO stance, while the League’s position is closer to being pro-Russia. One issue on which the two political forces are united is migration: they could even begin tussling with the European institutions on this issue as early as the European Council meeting of 28-29 June. The revision of the Dublin Treaty, stricter rules on receiving economic migrants and tougher action on landings are to be expected.
This “unusual” government will put investor complacency to the test. The bond market has shown its first signs of nervousness this week, with the risk premium on Italian sovereign debt up from 120 to 130 basis points so far. The scaling back of ambitions on tax reform and the proposed universal income have reassured the market. However, one issue to which investors and rating agencies alike will remain very attentive is pension reform. The two political forces are reported to have reached agreement on dismantling the reforms implemented between 2009 and 2011. These reforms laid the groundwork for a complete transition from the defined benefit system to a defined contribution system (provided for by the 1995 reform), introducing the automatic revision of benefits based on changes in life expectancy, and thus guaranteeing a change in the trajectory of expenditure as early as 2030. Backtracking would therefore have major implications for the long-term sustainability of public finances.
Paola MONPERRUS-VERONI, Group Economic Research