Rome – Giulia lives in Rome and is paying off a loan for a new apartment. Which is why she is now thinking about opening a bank account in Germany.
She is reacting to plans by Italy’s populist government to hike the deficit, in defiance of EU budget discipline rules, which some say could put the country’s continued euro membership in danger.
“Irresponsible political class”
“I am worried about the political situation. Because it weakens us instead of making us stronger. This political class is irresponsible,” the 45-year-old says. “I have a loan and am afraid that I won’t be able to pay it back if Italy leaves the euro.”
Because she works with one of Rome’s ministries, Giulia does not want her full name made public.
“My salary would then be converted into liras, but the bank loan would not,” she said about Italy quitting the eurozone. She thinks it is a real possibility – despite all the contrary assurances of ruling parties, the anti-establishment Five Star Movement (M5S) and the nationalist League.
It’s no wonder that people are nervous. For weeks the drama surrounding the next Italian budget and the country’s heavy debts has been raging. Numbers were juggled, night-time summit meetings held, deadlines pushed back and big promises made.
“Poverty will be abolished,” deputy premier, industry minister and M5S leader Luigi Di Maio said last month, trumpeting budget plans to introduce basic income subsidies for 5 million people living under the poverty line.
Italy’s planned largesse
Meanwhile, deputy premier, interior minister and League leader Matteo Salvini railed this week against the “enemies in the Brussels bunker” – that is, the European Commission – who dared criticize Italy’s planned largesse.
Parliament has approved government budget plans foreseeing a 36.7 billion euros of extra spending for 2019, of which nearly two-thirds will be financed by a higher deficit, rather than cuts in expenditure or higher tax revenues.
The problem is that Italy’s debt already stands at more than 130 per cent of its gross domestic product (GDP), one of the highest levels in the world, and more than twice the eurozone’s recommended level of under 60 per cent.
Hence, the alarms have been sounding in Brussels and on international finance markets. People start the day listening to radio reports about the “spread” – a sort of temperature check of Italy’s financial fever.
The index measures the yield differential between Italian and benchmark German 10-year bonds. When it rises – and this month it has surged to the highest level since early 2013 – it means that Italy’s huge public debt becomes even more expensive to service.
Jump of “spread”
So, with every jump of the “spread,” the tone of radio news readers gets more urgent, and politicians more nervous. “If the spread goes wild, the budget will have to change,” EU Affairs Minister Paolo Savona has told RAI state TV.
Rome must send detailed budget plans to the EU Commission for a review to determine whether they are in line with EU rules.
But Di Maio and Salvini are in no mood for compromise, even if other institutions like the Bank of Italy, the International Monetary Fund and the Parliamentary Budget Office, an independent watchdog, have warned about financial instability ahead.
Finance Minister Giovanni Tria, a technocrat who belongs to neither ruling party, has told parliament that the government will “do whatever it can” to win back the trust of the markets, but not at the cost of giving up on its “budget of growth.”
Within the eurozone, Italy has a list of negative records. Economy professor Veronica De Romanis recently listed them in a meeting with the foreign press. “Growth: last place. Employment: last place. Debts: first place,” it read in her power-point presentation in Rome. She noted that only Greece was in worse shape.
Between 1999 and 2017, Italians’ per-capita wealth has remained flat – whereas it rose in other troubled southern European nations like Greece or Portugal, not to mention Britain, Luxembourg and Germany. Is it all to blame on the euro and austerity policies, as Rome’s ministers want people to believe? De Romanis has a different opinion: she says Italy has not experienced any austerity at least since 2014.
The government says borrowing extra money is necessary to stimulate growth, but most economists see this as a risky gamble. There is no political appetite for painful economic reforms – for this would cost votes.
“We have the people behind us and the establishment against us,” Di Maio asserts. In this he is not wrong: the government’s approval rating is around 60 per cent.
Piero Casale of southern Italy, unemployed and a Five Star Movement voter, is not surprised by the market jitters. To the contrary, he thinks this is normal. The government is, after all, trying to take “a different path,” the 43-year-old says. And that’s the reason so many people voted for it.