Could Italy’s next government lead to EU reform?

League party leader Matteo Salvini talks during a news conference the day after Italy’s parliamentary elections Reuters

The prospect of a  coalition government in Italy between the  Five Star Movement (M5S) and the right League party is, is causing serious concerns in Brussels.

The two parties are close to forming a government promising to increase spending and try to renegotiate Europe’s austerity-imposing Stability and Growth Pact budget limits.

“Their plans on fiscal policy would result in a huge increase in the  Italian 132%, deficit, a blatant violation of EU deficit rules,” said Federico Santi, an analyst at Eurasia Group.

(Greece was forced into the first bailout memorandum with less than 120% deficit)

Italy is a founding member of the European Union and the eurozone. But years of economic stagnation have seen its government debt soar to 132% of GDP, the second worst ratio in the region after Greece.

Italy accounts for about 15% of eurozone GDP and 23% of the bloc’s public debt, according to data from Berenberg Bank.

“For comparison, Greece contributes 1.8% to eurozone GDP and 3.3% to its pile of public debt,” said Holger Schmieding, the bank’s chief economist.

The coalition parties reject EU austerity and want to renegotiate Italy’s debt and the SGP spending limits.

The draft coalition agreement is promising to deliver, at least partially, on three of the parties’ key election pledges.

Guaranteed income for the poor

Poor families will get a €780 (£682; $919) basic monthly income, provided recipients actively seek work, the parties say.

An EU solution to Immigration 

It demands more EU help for Italy, the main destination for migrants arriving from North Africa with deportations of up to 500,000 undocumented migrants.

That would require the creation of “temporary stay facilities” throughout Italy for migrants earmarked for expulsion, the parties say.

The plan calls for the effective relocation of asylum-seekers EU-wide – a scheme already rejected by some EU states. And it demands stronger co-operation to fight people-smuggling gangs.

Two income tax rates

New “flat tax” rates are to be introduced. The plan aims to reduce income tax rates to just two brackets, set at 15% and 20%.

Families would receive a €3,000 annual tax deduction based on household income. Sales and excise tax increases next year, worth €12.5bn, will be scrapped.

The 58-page joint pact, or “contract”, does not explain how all the extra spending will be financed but the coalition appears determined to breach the EU national budget spending limits.

Cutting Italy’s debt

Friction is expected with the EU over Italy’s public debt; it is currently 132% of national output (GDP), the second-highest in the EU after Greece.

The coalition says they want revisions to the EU’s Stability and Growth Pact, which sets a tough budget deficit limit of 3% of GDP.

The plan aims to reduce debt through “the revival of internal demand”, not by continuing austerity.

The plan makes no mention of Italy withdrawing from the eurozone, despite much criticism of the euro by both parties. Five Star leader Luigi Di Maio says the party is no longer pushing for a referendum on the euro.

Reaching out to Russia

The populist leaders disagree with the EU sanctions on Russia and want them lifted. They do not see Russia as a military threat, but as “a potential partner for the EU and Nato”.

Pension reform

The minimum monthly pension is to be set at €780.

The plan abolishes the current pension reform that raises the retirement age in phases.

Instead, a new points system would combine people’s total years of social security contributions with their age. The total must be at least 100, meaning that someone who has paid into the system for 41 years, for example, could retire at 59.

It envisions a minimum basic income of €780 a month for the poorest Italians, funded by the state. M5S said during the campaign that the basic income would cost €15 billion a year.

Source – BBC, CNN