In his inaugural speech before Parliament, Italy’s new prime minister, Guiseppe Conte, stressed his populist bona fides while moderating some of the positions that ruling coalition members 5 Star and Lega, had adopted during their campaign. The most striking was that Conte walked back the idea of a possible Euro exit, as well as delaying and diluting a key 5 Star promise, that of an income guarantee.
However, a more measured populist stance wasn’t enough to satisfy Mr. Market, since Conte stressed that Italy wants to renegotiate some of the Eurozone economic rules of the road, with getting more spending wriggle room a key demand. Interest rates on Italy’s two year government bond rose 22 basis points after Conte’s speech, to 1.02%.
Noteworthy – in addition to what has been illustrated in the planning speech at the beginning of the session – also some issues on which Conte returned mid-afternoon, at the time of the reply, at the end of the debate. “The exit from the Euro is not in question, and it is not a goal we want to pursue,” the prime minister reiterated, once again emphasizing his government’s distance from market fears, which emerged even today from the spread trend. “The theme – he clarified – is another: is it legitimate or not for a government, a country, renegotiating economic policies? Do we have to give up discussing economic policies? We are talking about this. If there is any margin or not we will find out. We are determined to do it ».
However, this was not part of the prepared speech. Indeed, as Il Sole pointed out:
Among the key words of the government contract, which do not appear in the debut speech, we also note the absence of “fiscal peace”, “Euro”, “Tav”, even if different topics, from the tax authorities to Europe, to public tenders and works, he has dedicated specific steps.
Investors wanted to hear a firm promise of Euro loyalty. The Financial Times noted the absence of any statement that Italy was “inextricably bound to the single currency.” But given that the two parties had wanted to appoint a strident Eurozone critic as finance minister, Conte’s stance in his debut represents a marked shift in a short period of time.
Conte stressed that his government would seek Eurozon-EU level reforms on many fronts. As Politico noted:
He said the two governing parties have been “accused of being populists and anti-system, well … if populism is the ruling class listening to people’s needs … if anti-system means aiming at introducing a new system … then both political forces deserve both these qualifications,” he said.
The Financial Times highlighted this section:
“Monetary union must be oriented towards the needs of citizens and must balance the principles of responsibility and solidarity more effectively,” Mr Conte said.
Conte positioned the coalition’s spending plans as fiscally responsible because it would reduce Italy’s debt by increasing growth. However, he appeared to be trying to combat the image that Italy would go on a spending spree. 5 Stars’ key promise, of instituting a basic income, will not be implemented until the government has expanded and improved its job centers, and only those who participate in them will be eligible. From the Il Sole Google translation:
“I am sorry that the income of citizenship has been represented as a measure of welfareism. If you read the contract carefully you can see that it is a measure aimed at job placement. Let’s talk about active labor policies otherwise, we recognize it ourselves, it will not work,” underlined Conte again, defending the Government’s program on measures related to the income of citizenship.
He also pledged to end “golden” pensions of over €5000 a month and rejected a VAT increase in favor of tax reform. Again from Il Sole:
In the enunciation of the programmatic line of the new executive, Conte has not established a timetable for the measures to be taken. But he reiterated the priority of the flat tax . “We are promising a complete revision of the tax system of income for individuals and businesses”, said Conte reiterating that “the goal is the” flat tax “, a tax reform characterized by the introduction of fixed rates, with a system of deductions that can guarantee the progressivity of the tax, in full harmony with the constitutional principles “. With a corollary of no small importance: “It is necessary to tighten up the existing administrative and penal sanctions framework, in order to ensure the true prison for the great evaders “.
Ahem, if you think a flat tax will wind up being progressive, I have a bridge I’d like to sell you. Yanis Varoufakis is skeptical too, particularly since this is a Lega idea, and hence no reason to think it will morph to being left wing in its design.
While Conte said that Italy would remain allied with NATO and the US, but he wants to reduce Italian troops deployed in Afghanistan, and opening relations with Russia, which among other things, would require the US to relax its sanctions.
On immigration, Conte appeared not to say anything new. He criticized the EU for its failure to reduce arrivals in Italy but also maintained that citizens “are not and will never be racist” in how they handle matters going forward.
The government has promised to fight a good fight with the Eurozone overlords to get more spending and growth for the benefit of ordinary Italians and Europeans generally. As numerous commentators have pointed out, Italy’s weak spot is its wobbly banks, which would become even more wobbly if Italian bond prices were to fall because Mr. Market disapproved of the government’s economic plans. I’m not sure how the coalition can square this circle, since even introducing a parallel currency designed only for domestic use, to allow for more spending, could spook the horses. But Conte also appears to be signaling that the coalition will proceed in a deliberate manner, and steady pressure is probably the only way to force the Germany and its allied to relent on some of their deeply held but sorely misguided ideas.