One wonders why this is an issue, when nations of the European Union freely gave up sovereign control of their fiscal affairs. Does it come as any surprise that a nation would want to put the well-being of its people before the politics of a coalition? That is exactly what is happening in Italy at this moment. The leaders of the parties in Italy’s alliance government have signaled they will seek leeway for deficit spending next year, putting it on a collision course with the European Commission and investors. On August 31, Fitch Ratings cited budget concerns as it changed its outlook on Italy to negative from stable. The overall grade remains two notches above junk. In what appears to be a fiscal dichotomy, neither Matteo Salvini nor Luigi Di Maio, the heads of the League and 5-Star Movement respectively, backed away from campaign promises to cut taxes and boost welfare spending.
Di Maio is leading an effort to mandate a universal income for the Italian people. One wonders if they have studied the surveys on how this socialist model is an utter failure. Investors should be spooked by this, and not surprised when Fitch and other rating agencies further downgrade Italian debt. Universal income will sink Italy faster than the Titanic, but somewhat slower than the fall of Rome in 476 AD by Germanic leader Odoacer. I imagine Romulus, the last of the Roman emperors in the west, also had a plan to prop up Italy.
This is a striking chart, in that Italy would have achieved a budget surplus if it had not embarked on a welfare spending spree. One would imagine that the hopes of Salvini and Di Maio lie in the fact that tax cuts will pump new life into the economy, and be able to sustain the deficit spending. Timing of trickle-down revenue from tax cuts is a risky proposition, as you ostensibly have no control of it. However, you can control the rate of government spending. The markets will be eying this mix closely in the weeks and months to come. Goldman Sachs says Italian assets will remain volatile as divisions within the administration cast doubt on the government’s commitment to lowering public debt. “Agreeing on such a budget will likely be a difficult and controversial process, with the risks skewed to a less favorable outcome,’’ said Silvia Ardagna, a fixed-income strategist at the bank.
The Italian populist government that took office in June in committed to Keynesian ways to grow the economy. Where have all the brilliant Italian mathematicians gone? Probably to the Amalfi Coast for the season. This government spending spree has given Italy the notable distinction of being the third largest debtor nation in the world. So what do they propose; spend more. Italy plans on pushing the debt to GDP cap mandated by the EU to the brink. Next year’s budget will see the deficit almost double to “touch” the European Union’s 3 percent deficit ceiling, Salvini said Sunday at an event in northern Italy. Maybe the Italians need to spend less time in the Riviera in August, and not close up shop most afternoons for a break, to attempt to get the economy going again.