Italy’s Five Star and League set to take power

Anti-es­tab­lish­ment par­ties agree deal to cut taxes and in­crease wel­fare spend­ing

The Irish Times - - World News -

Italy’s two anti-es­tab­lish­ment par­ties agreed the ba­sis for a gov­ern­ing accord yes­ter­day 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.

Lead­ers of the far-right League and the Five Star Move­ment, which emerged as two of the big­gest par­ties from an in­con­clu­sive elec­tion on March 4th, have been dis­cussing a com­mon pol­icy agenda to form a coali­tion gov­ern­ment and end more than 10 weeks of stale­mate.

When Five Star leader Luigi Di Maio emerged from a four-hour meet­ing with League chief Mat­teo Salvini, he said the two par­ties had to ham­mer out a few “mi­nor de­tails” and that the pro­gramme should be fi­nalised later in the day.

Mo­ments ear­lier, a Five Star source had said the pro­gramme had been sub­stan­tially agreed and that it con­tained no ref­er­ence to a pos­si­ble exit from the euro or “any­thing that could cause any con­cern re­gard­ing Italy’s euro mem­ber­ship”.

The accord has yet to be made pub­lic and still needs to be rat­i­fied by both par­ties’ mem­bers, as well as gain­ing ap­proval from Italy’s pres­i­dent. The par­ties had made progress on agree­ing a prime min­is­ter, Mr Di Maio said, but he did not give a name.

A draft of the accord re­viewed by Reuters ear­lier yes­ter­day spelled out a spend­ing plan 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 euro zone’s third-largest econ­omy.

Fis­cal head­room

In a di­rect chal­lenge to EU fis­cal rules, the draft accord also called for the bloc to cre­ate fis­cal head­room for spend­ing by ad­just­ing the for­mula used to cal­cu­late 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 more than 130 per cent is sec­ond only to Greece in Europe – the draft accord pro­poses dis­count­ing hun­dreds of bil­lion euro in Ital­ian debt pur­chased by the Euro­pean Cen­tral Bank un­der the bank’s quan­ti­ta­tive eas­ing (QE) pro­gramme.

Yes­ter­day, the EU’s sta­tis­tics of­fice said it can­not ex­clude Ital­ian bonds held by the ECB from its debt cal­cu­la­tions.

News of the draft accord has caused con­cern in Brus­sels, where Euro­pean Com­mis­sion vice-pres­i­dent Valdis Dom­brovskis told the Euro­pean 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

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

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 bond yields were set for their big­gest two-day jump since March last year.

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

The plan promised to in­tro­duce a 15 per cent flat tax rate for busi­nesses and two tax rates of 15 and 20 per cent for in­di­vid­u­als – a re­form long pro­moted by the League. Econ­o­mists say this would cost well over ¤50 bil­lion.– Reuters

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