Italy threat to rip up Eu­ro­zone rules shakes EU power­bro­kers

Irish Independent - - World - Giuseppe Fonte Rome

ITALY’S two anti-es­tab­lish­ment par­ties met yes­ter­day to fi­nalise a gov­ern­ing accord that would slash taxes, ramp up wel­fare spend­ing and pose the big­gest chal­lenge to the Euro­pean Union since Bri­tain voted to leave the bloc two years ago.

The far-right League and the 5-Star Move­ment, two of the big­gest par­ties af­ter the in­con­clu­sive elec­tion on March

4, have been dis­cussing a com­mon agenda to form a coali­tion gov­ern­ment and end more than

10 weeks of stale­mate. Ac­cord­ing to a cur­rent draft agenda viewed by Reuters, the two sides would em­bark on poli­cies that would breach EU rules on fis­cal dis­ci­pline: cut­ting taxes, in­creas­ing wel­fare pay­ments for the poor and scrap­ping an un­pop­u­lar pen­sion re­form.

The poli­cies would cost many bil­lions of euro and have spooked in­vestors in Ital­ian debt, shares and the euro. Italy is the zone’s third-largest econ­omy.

As a di­rect chal­lenge to EU fis­cal rules, the draft accord also wants the bloc to cre­ate fis­cal head­room for spend­ing by ad­just­ing the for­mula for Italy’s debt bur­den, which the rules say must be re­duced.

In cal­cu­lat­ing debt as a pro­por­tion of gross do­mes­tic prod­uct – Italy’s ra­tio of 130pc is sec­ond only to Greece in Europe – the draft accord pro­poses dis­count­ing hun­dreds of bil­lion eu­ros in Ital­ian debt pur­chased by the Euro­pean Cen­tral Bank un­der the bank’s quan­ti­ta­tive eas­ing pro­gramme.

News of the draft accord has caused con­cern in Brus­sels, where Euro­pean Com­mis­sion vice pres­i­dent Valdis Dom­brovskis told the EU par­lia­ment that Italy’s new gov­ern­ment should stick to fis­cal dis­ci­pline and keep re­duc­ing pub­lic debt.

“This is our mes­sage to the new gov­ern­ment. It’s im­por­tant to stay the course,” Mr Dom­brovskis said.

Italy’s bor­row­ing costs have been rising as de­tails of the accord emerge.

The gap be­tween the yields on Italy’s bench­mark bonds and safer Ger­man bonds was at its widest since early Jan­uary as Ital­ian 10-year yields were set for their big­gest two-day jump since March last year.

Out­go­ing Ital­ian Prime Min­is­ter Paolo Gen­tiloni told a meet­ing of EU lead­ers in Bul­garia that he and other lead­ers were wor­ried that fun­da­men­tal issues such as the need to safe­guard pub­lic ac­counts were now up for po­lit­i­cal dis­cus­sion.

The draft pact proposed a new “uni­ver­sal in­come” for the poor costed at €17bn, while it said a planned soft­en­ing of an un­pop­u­lar pen­sion re­form would cost €5bn.

The plan promised to in- tro­duce a 15pc flat tax rate for busi­nesses and two tax rates of 15 and 20pc for in­di­vid­u­als – a re­form long pro­moted by the League. Econ­o­mists say this would cost well over €50bn in lost rev­enues.

There was still no word on the thorny is­sue of who would be prime min­is­ter. Nei­ther League leader Mat­teo Salvini nor 5-Star leader Luigi Di Maio wants the other to get the job, but they have yet to find a mu­tu­ally ac­cept­able al­ter­na­tive fig­ure.

Pres­i­dent Ser­gio Mattarella, who has re­peat­edly stressed the im­por­tance of main­tain­ing a strong, pro-Euro­pean stance, may also be dis­mayed at any deal the League and 5-Star come up with.

Each party plans to con­sult its sup­port­ers over the week­end to see if they back the pos­si­ble pact for gov­ern­ment.

5-Star leader Luigi Di Maio

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