Fiscal Freedom in the Eurozone?
Italy's draft budget is the latest evidence that the EU fiscal framework, according to which national budgets are supposed to comply with common rules, is broken. To prevent an eventual disorderly breakup of the eurozone, a new framework must be devised.
LONDON – Italy’s government has approved a draft budget that would fund its expensive election promises by violating European Union fiscal rules for at least the next three years. With that, the populist coalition – comprising the anti-establishment Five Star Movement (M5S) and the far-right League party – has seemingly confirmed fears of populist-fueled instability in Europe.
The budget represents the victory of Italy’s two deputy prime ministers – M5S’s Luigi Di Maio and the League’s Matteo Salvini – over the country’s independent, technocratic finance minister, Giovanni Tria, who had presented a more conservative proposal. Any illusion that the populist coalition could be kept in check by moderate cabinet members has now been destroyed. Italy’s new “government of change,” which has been in power less than four months, is clearly both willing and able to challenge the EU.
Unsurprisingly, the market has reacted badly to the draft budget. But a full-blown speculative attack on the government-bond market is unlikely. After all, the key to debt sustainability is economic growth. And while a large fiscal deficit, fueled by tax cuts and increased current spending, is unlikely to help much on this front, it is not as if Italy’s attempts at fiscal consolidation were fueling a strong recovery.
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