Italy: New government set to face serious fiscal problems – ABN AMRO

Aline Schuiling, senior economist at ABN AMRO, suggests that Italy’s incoming coalition government of the left-wing populist Five Star Movement (M5S) and the centre-left social democratic pro-European Democratic Party (PD) programme states that the rules for fiscal policy need to be changed in order eliminate the excessive rigidity of the fiscal rules, and to allow for more investment and social cohesion within Europe.

Key Quotes

“The M5S-PD government will probably have serious problems implementing its plans. According to the agreement with the European Commission the budget deficit (2.1% of GDP in 2018) needs to decline to 2.04% in 2019 and 1.8% in 2020.”

“In case these targets are not met, it was agreed that the VAT rate would be hiked or other income-generating measures amounting to EUR 23.1bn (1.3% of GPD) would be implemented in 2020. We think the M5S-PD government will likely not meet the agreements with the EC, not only because of its new policy plans, but also because Italy’s economy is likely in recession.”

“We see a high risk that the budget deficit breaches the 3% GDP mark next year. In any case, Italy’s government debt ratio (132% GDP in 2018) is expected to continue to rise this year and the next, implying that the EC’s Excessive Deficit Procedure (EDP) could be triggered after all.”