A spectre in Europe?

Limits and contradictions of the "Contract" at the base of the coalition government between the Five stars and the League..

The new Italian government is mainly “made in Berlin”, because of the austerity doctrine. But Italy will not exit the Eurozone, at least in the near future, nor the new government will carry out a fiscal devaluation. The Lega-M5S government program will be implemented only partially and in small doses. Macron will probably receive support from the new government but without particular results.

Reading the "government contract", i.e. the program resulting from the political agreement between the two political groups, Lega and M5S, which cannot be called by its name because of the fifth-starred mythology, we realize that it is the juxtaposition of the two electoral programs; where it is easy to recognize the M5S chapters (e.g. "environment, green economy and zero waste") and the Lega ones (e.g. "immigration, repatriation and business stop"). We find the main Lega proposal (flat tax) and the main M5S proposal (citizenship income), in addition to the "stop to Fornero’s bill"(early retirement), a goal shared by both political forces.

A program of that kind is, at least, a legislature program, and perhaps more than one. The flat tax implies a loss of revenue on 50 billion, the citizen income costs 27 and not 17 billion. As for the revision of Fornero’s bill is concerned, the "contract" claims to want to limit spending to 5 billion. We are already over 80 billion, only for these three points of the program. In an article sent to the main economic newspaper (Il Sole 24 Ore) on 24-4-18 Paolo Savona highlighted the contradiction between Italy's permanence in the euro area and the full implementation of the program. He therefore suggested to the President of the Republic to hold new elections so that voters could make an informed choice. What is a little strange is that the same Savona was suspected of secretly preparing a "plan b" for the exit of Italy from the Eurozone.

The complicated, and sometimes ludicrous, story of the formation of the government (Monty Python like, it has been said) has led Prof. Savona to deal with the community files; he will be able to argue with Brussels as much as he wants, but he will not formulate the stability law and will not sit at the Ecofin. At least for the near future no deliberate choice of Italexit can be seen. At least for the near future no deliberate choice of Italexit can be seen. There is probably even no increase in VAT, neither to finance the reduction in social contributions paid by employers, nor to finance (in part) the flat tax. The Minister of Economy seemed sensitive to this old demand from the business world, but the concern about a jump of the price level that would follow the increase in VAT is very strong.

If clear xenophobic signs can be recognized in the political policies of the government, the economic policy of the "contract" has typical right-wing connotations, with redistribution in favor of the rich and (to a lesser extent) of the poor, to the detriment of the middle classes; a completely wrong address also from a macroeconomic point of view. It is true that the "contract" talks about "investments with a high multiplier", but in reality the most substantial maneuver (50 billion), i.e. the flat tax, distributing money above all to high incomes, will have a very low multiplier, both because of the low propensity to consumption and of the high share of imports on consumer goods. A higher multiplier should have the citizen income, which in reality is guaranteed, means-tested, minimum income, similar to the existing Insertion income. Among other things the M5S proposal presents many problems; it is too generous with the individual and too low for a family with three or four people. It risks of finance the purchase of smartphones or other electronic gadgets.

Use of specific-purpose vouchers could mitigate these risks. In the "contract" one does not find concrete programs of investments in the protection of the territory, the securing of schools and other public buildings, research funding and the university.

Moreover, as we have mentioned, the next budget law will not contain flat tax and citizen income, but almost certainly a relaxation of the very unpopular retirement rules that had been launched by the Monti government; however, if the government wants to remain in a financing of five billion, it will have to displease some aspiring retiree.

As regards relations with the EU and especially with the other Eurozone countries, there are statements that seem more addressed to the Italian electorate than to the European chancelleries. Such as asking "simply" the revision of the Treaties. Above all in a situation in which many important decisions can be taken, for good or more probably for evil, without the need to put the Treaties in hand.

Moreover, a certain degree of dilettantism can be seen both in what has remained in the "contract" and in what has been removed. For example, regarding the deficit, it is stated that "we believe it is necessary to separate the expenditure on public investments from the current budget deficit, as announced several times by the European Commission and never effectively and completely applied". It is commonplace to note that in the current deficit, Eurostat has never dreamed of including capital expenditures. What the “contract” wanted to say is that in calculating the (structural) deficit valid for compliance with the fiscal compact, investment costs should not be taken into account. A proposal that can be completely shared by orthodox people like Mario Monti.

A proposal that has disappeared is that of the cancellation, for 250 billion, of the public securities held by the Bank of Italy, as part of the ECB's purchases with the QE program. Instead, the following proposal remained: "we will act in Europe to propose that the government securities of all the countries of the euro area, already purchased by the European Central Bank with the quantitative easing operation, are excluded pro quota from the calculation of the debt-to-GDP ratio ".

The proposal that remained is a curious interference in the statistical methods of Eurostat, as if the financial markets are not able to assess the "true" level of debt. The proposal that was canceled was a very clumsy way to raise an important issue: what to do with the mountain of securities bought by the ECB for all Eurozone countries. The proposal that makes sense is that the ECB should keep the sovereign bonds purchased indefinitely, renewing the maturing ones from time to time. In fact, until a security is in the balance sheet of a Central Bank, it is as if it did not exist, and does not constitute a burden for the Treasury, as interest is reversed, which explains why the Bank of 'Italy has increased the amounts reversed to the Treasury up to an amount of five billion.

Finally, in the "contract" there are not talking about some topics that will be the object of discussion, and perhaps decisive, in the next European summits: the European budget and the completion of the banking union. These themes were recalled by Giuseppe Conte, the President in charge, in his first public statement, on evident solicitation by the President of the Republic. Remember that on the topic of banks, the Brussels Commission will present a proposal on Sovereign bond-backed securities (securitization of public securities held by banks).

As for the ministers responsible for relations with Europe, the government will not present itself with the couple "bad cop, good cop", but with a trio: bad cop (Savona), good cop (Tria), a colluding cop (Moavero). It will be interesting to see what will come out of it.

Ruggero Paladini

Economist - Professor of "Scienza delle Finanze" at University "La Sapienza" Roma; Member of the Economic Board of Insight - ruggero.paladini@uniroma1.it