Italy still the same

The conflicting targets within the government in Italy are becoming ever more frequently evident. Following a further meeting of senior government officials ahead of the 2019 budget planning (due to start officially in September), both Prime Minister Conte and the leader of the Five Star Movement (M5S), Di Maio, made official statements about the status of discussions. Conte spoke first, and in a moderate tone. He calmed markets with statements that the government would set itself realistic targets and not implement all measures immediately and in their entirety. Today, the Italian press quotes him as saying that the government is aiming for the completion of the flat tax and the basic income within a period of five years. Di Maio adopted a completely different tone, by contrast. He demanded a rapid implementation of the government plan, holding out the prospect of tough negotiations with the EU Commission on implementing fiscal easing measures. The Lega’s economic mastermind, Borghi, recently let it be known that the government can even envisage a budget deficit of 4 or 5% next year.

Whereas it was feared at the start of the new government that M5S and Lega would engage in intra-government skirmishes, the line of conflict actually lies much more between the two party heads Salvini and Di Maio on the one hand, and Conte and Finance Minister Tria on the other. Tria was anyhow only included in the cabinet in order to address President Mattarella’s concerns about the new government. If the conflicts about targets within the government become more intense, it is to be feared that the more moderate forces will lose out without party political backing. The government’s in part still-moderate external image could evaporate in favour of greater radicalisation. Furthermore, currently good opinion poll results, especially for the Lega, as well as refugee policy „successes“ are giving a further following wind to the populists.

From a market perspective, the conflict promises little in terms of a good outcome. The fact that risk premiums for Italian government bonds have largely stabilised at a high level following the sell-out between May and mid-July mainly reflects investor confidence in Conte and Tria being able to rein in the hardliners within the government. The recent wave of rising spreads is at risk of accelerating even further if such confidence evaporates, either because the expectation arises that Conte and/or Tria will resign, or because they prove unable to get their way.

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