Economists see potential nightmare in new italian government gas out game rules

#

Leader of the League party, Matteo Salvini, left, accompanied by party’s colleague Giancarlo Giorgietti, address the media after a meeting with Italian President Sergio Mattarella at the Quirinale presidential Palace, in Rome, Monday, May 21, 2018. Italy edged toward its first populist government Monday as the president convened the leaders of the anti-establishment 5-Star Movement and the right-wing League in what could be a final consultations, 11 weeks after elections left the country with a hung parliament. (Ettore Ferrari/ANSA via AP)

MILAN (AP) — The prospect of a populist government in Italy, the eurozone’s third-largest economy, has spooked European partners and investors who fear its euroskeptic, budget-busting program could shake the region’s cohesion and undermine its growth.

Rival populist forces — the anti-establishment 5-Star Movement and right-wing League — squeezed their often competing agendas into a government program that suggests a spending spree that would add to Italy’s debt load, already Europe’s heaviest after Greece, with little detail on financing.

But what is most concerning to economists, other eurozone nations and financial markets is a euroskeptic attitude that both political parties share, even if they omitted language from an early draft that called for ways to allow countries to exit the common euro currency.

The program was first outlined last week and would be the blueprint for a government if it is approved by the president in the coming hours or days. It includes pet projects to establish a basic income for needy Italians and a two-tier flat tax. The parties also want to cancel scheduled increases to sales tax, and eliminate some taxes at the gas pump. But the most worrying to many are plans to roll back hard-won pension reforms passed by the last parliament.

Analysts say all of this could cost 170 billion euros ( billion), or 10 percent of GDP. That would add to a perilously big debt pile of 2.1 trillion euros, or 132 percent of GDP. By comparison, U.S. debt is about 105 percent of GDP and Germany’s 68 percent.

Economist Raj Badiani of IHS Markit says that when coupled with plans to repatriate hundreds of thousands of migrants — a potential labor pool in aging Italy — the rollbacks could erode Italy’s ability to pay for its massive pensions system, which currently costs 15 percent of GDP each year.

An early draft of the parties’ program had included a call to cancel 250 billion euros in Italian public debt, a move that would go against EU treaties and would be practically unfeasible, analysts say. That call was removed from the final program, but alerted investors to the extent to which the two parties are willing to contemplate unorthodox economic policies.

So far, the jitters in financial markets — which are largely measured in the bond market — have been relatively contained. But that is largely thanks to the European Central Bank’s massive stimulus program in which it is buying bonds, including Italian ones.

The 10-year bond yield, a measure of investor concern over a country’s likelihood of default, has risen from around 1.74 percent last month to 2.29 percent. While that’s a sharp rise, the rate is still low, thanks to the ECB bond-buying program, analysts say. When financial markets really worried that Italy might fall out of the euro in 2011, the rate hit 7 percent.

In a worst case scenario, a spike in bond yields could render Italy unable to finance itself over the long term. Italy’s debt pile is almost seven times bigger than Greece’s and could prove too much to be bailed out by its European partners.

The government program estimates that extra money that businesses and consumers would keep thanks to a flat tax and minimum salary for poorer households would provide economic stimulus by boosting spending and investment. In turn, that could offset the rise in the deficit and debt. But economists warn that some of that money will go into savings, and the program does not include long-term structural changes needed to ensure sustainable growth.