Italy to defy EU’S grip with €80bn safety blitz
ITALY’S populist government is drawing up a “Marshall Plan” of up to €80bn (£72bn) to rebuild the country’s dilapidated infrastructure after the Genoa bridge collapse, seizing on the politically-charged disaster to smash EU budget rules.
Officials aim to invoke the “Golden Rule” championed by Gordon Brown to remove chunks of public investment from the headline budget deficit, a ruse that would make it easier for the radical Five Star-lega coalition to open the floodgates of fiscal stimulus and reflate Italy’s stagnant economy.
It would be a high-risk gamble at time when the rating agencies have their fingers on the downgrade trigger and the European Central Bank is winding down its purchases of Italian debt. Spreads on Italian two-year bonds have already jumped to 200 basis points, a dramatic move since March when the spread was under 30 points and the bond vigilantes seemed unaware of the political risk building in Rome.
Matteo Salvini, the interior minister and strongman of the nationalist Lega, said the collapse of the Morandi Bridge with 43 deaths had exposed the folly of EU austerity doctrines. “The Italian state must invest all the money needed to ensure the safety of our roads, railways, schools and hospitals, regardless of limits and mad European rules imposed on us,” he said.
Finance minister Giovanni Tria has until now taken a cautious line on EU spending rules, seeking to play down fears in Brussels that the Five Star-lega alliance will charge ahead with electoral promises worth up to 6pc of GDP.
But he has changed tack since the tragedy, calling for a comprehensive plan to rebuild Italy’s degraded infrastructure on the basis of the Golden Rule and “without budgetary constraints”. Officials think they may have some latitude to activate an €82bn plan drawn up by the previous Gentiloni government for long-term investment. “How can this be funded? It is still a mystery,” said Lorenzo Codogno from LC Macro Advisors.
Prof Tria is under enormous pressure to relax austerity and ignore EU demands for a further fiscal consolidation of 1pc of GDP in the next budget, to be presented by October. He was effectively imposed on the Five Star-lega alliance by Italy’s pro-eu president as a compromise choice and has no electoral power of his own.
The political reality is that if Mr Salvini is thwarted too openly over the budget, he may at any moment chose to capitalise on his surging popularity to force a snap election. This would probably deliver a final crushing defeat for Italy’s old establishment, and lead to an even more Eurosceptic government.
Prof Tria is in any case no friend of austerity. He was a quiet critic of eurozone policies during the self-inflicted depression. He advocated “helicopter money” and outright monetary financing of deficits as an academic economist.
Brussels has denied that EU budget rules played any role in the Genoa tragedy, insisting that it had given the country wide fiscal latitude and encouraged infrastructure spending. The Commission cited EU funding of €2.5bn for Italian public investment from 2014 to 2020, as well as project funding from the Juncker Plan.
Mr Salvini dismissed this as “charity”, a recycling of Italian tax money
sent to the EU in the first place, but returned on a rationed basis with strings attached. The Commission’s legalistic riposte does not address the deeper issue of whether the eurozone’s scorched-earth fiscal ideology and austerity overkill from 2010 onwards led to a generalised collapse in public investment, pushing a string of countries into a downward spiral.
Keynesian Nobel laureates such as Paul Krugman and Joe Stiglitz say it was a fundamental error to slash spending in a global liquidity trap, a repeat of Hoover’s disastrous pro-cyclical policies in the Thirties. The proper response should have been to step up public investment and rebuild the infrastructure at a time when capital was abundant and the fiscal multiplier was potent. The root cause of this great error was to treat Europe’s crisis of banks, private balance sheets, and capital flows, as if it was a crisis of public debt. The lack of a lender-of-last-resort standing behind eurozone states compounded the problem for Italy, which was forced to carry out draconian cuts.
When premier Silvio Berlusconi refused to obey orders in 2011, he was toppled and replaced by a former EU commissioner in what was clearly an Eu-orchestrated move. In theory, states could have cut middle class transfer payments rather than eroding future economic dynamism by slashing investment to the bone. In reality, social spending and pensions are very hard to cut. The path of least resistance for politicians is to cut investment projects (and defence), even if this is macro-economically illiterate.
Paolo Becchi and Giuseppe Palma argue at the Scenari Economici website that EU austerity and the EU legal framework is central to the Genoa tragedy, whatever the precise engineering issues involved in the Morandi Bridge.
“From the moment we joined the EU and the euro we lost our ability to guarantee the fundamental rights of our citizens, in health, road security, and schools. And when once we ratified the Fiscal Compact and inserted a balanced budget clause in our constitution, the state lost all ability to intervene.”
They point out that it was EU pressure on Italy to privatise state assets in the Nineties before admission to the euro that explains why the Morandi Bridge ended up in the hands of Atlantia and the Benetton family in the first place.
Great chunks of Italy’s industrial core and infrastructure held by the Thirties-era Istituto per la Ricostruzione Industriale were privatised at suspiciously low prices, much to the benefit of a small interlocking elite. Prosecutors and investigators who probed these sales too vigorously ran into serious personal trouble.
It is unclear how the Italian people will react to the furious arguments being traded over the Genoa disaster, but it is clear that many would welcome a blitz of public investment even if it means open defiance of Brussels.
Italy is supposed to cut its deficit to 0.8pc of GDP in 2019 under the abstruse rules of the Stability Pact. The actual figure is likely to blow through 3pc as the Five Star-lega alliance cancel a planned rise in VAT, and start to push through their pledges for universal basic income, a flat tax, and reversal of pension cuts.
A Marshall Plan on schools, roads, and Italy’s 60,000 bridges provides the perfect political cover for what is really aggressive reflation and a reassertion of Italian economic self-government. Whether the debt markets will fund this adventure is an open question.