- Turmoil within the Five Star Movement (M5S) is complicating the government’s path ahead, mainly due to its impact on the strength in parliament of the ruling coalition.
- A plan for economic recovery and reform is nowhere to be seen.
- The focus of the government remains on easy wins, such as securing additional funding for shock-absorbers and (allegedly) cutting red tape.
Short of a majority in the Senate
The ruling coalition has lost its “technical” majority in the Senate due to the recent defection of Senator Alessandra Riccardi, who left the M5S to join the Lega. The ruling coalition is now formally backed by 160 senators, one short of the threshold needed to control a majority. As a result, the government will become even more dependent on the (external) support from senators who are either independent or affiliated to other groups to survive. While Matteo Salvini’s Lega is suffering in the polls, its war of attrition against the ruling coalition is working. This is mainly due to the endless turmoil within the M5S, which could result in further defections (two other M5S senators are reportedly ready to jump ship and join the Lega. A third one is about to exit M5S and join the “Gruppo Misto”) in the short-term.
Further stretching the budget (but not for a VAT cut)
The government will soon seek parliamentary approval to boost spending by at least EUR 10bn (this is likely to levitate to around EUR 20bn by the time the request is submitted), bringing the budget deficit to around 11-11.5% of GDP from the current projections of 10.4%. Most of the new financial resources will be used to finance the government’s furlough scheme, provide additional funding to regions and municipalities, and strengthen a guarantee fund for SMEs. The furlough scheme is currently set to end in mid-August, but an extension is likely due to the fear of a spike in unemployment ahead of a critical voting round in late September.
The idea of cutting VAT initially floated by Deputy Finance Minister Laura Castelli (who has neither the competence nor the political weight required for the job) and somewhat embraced by PM Conte – in his usual pursuit of headlines in the papers – is not getting much traction. Leaving aside the M5S, all the other coalition partners are opposed. Confindustria and the trade unions have also expressed their negative views on the matter. A VAT cut would also raise further concerns in Brussels and other European capitals about the government’s (non-existent) commitment to reform while the difficult talks over the European Recovery Fund are set to enter a critical phase.
It is estimated that a 1% cut of the standard VAT rate (22%) would cost EUR 4.3-4.5bn/year, whereas a 1% cut of the lower VAT (10%) would cost EUR 3.1bn/year.
ESM – It is a question of time
The other short-term key signpost relates to a possible request to tap the ESM’s pandemic credit line, which allows Italy to borrow as much as EUR 36bn at about 0.1% interest. Rome is unlikely to make a move until talks over the European Recovery Fund are completed. As the ESM has become toxic in Italian politics, the government could seek a join vote on the ESM and the European Recovery Fund to reduce the likely political backlash and secure the required parliamentary majority. Regardless, this will be a very delicate passage for the executive.
Another failed attempt to tackle red tape
A government that has recently issued a 321-page-long decree (Decreto Rilancio) composed by 266 articles, which requires around 90 additional regulatory or legislative measures to be implemented, claims it will deliver a decree (Decreto Semplificazione) aimed at cutting red tape next week. Just like similar past initiatives, this new attempt to simplify the legislative framework is unlikely to make any meaningful difference to businesses and individuals. The government, though, will suggest that the move kick-starts major infrastructure projects across the country.
An important electoral test is looming
A round of regional and local elections plus a Constitutional referendum on cutting MPs numbers are expected to take place on 20-21 September. Voters in seven regions (Veneto, Campania, Tuscany, Liguria, Marche, Puglia, and Valle d’Aosta) and 1,149 municipalities will go to the polls. This will constitute the first electoral test for the government in the aftermath of the pandemic and, as such, it will be a significant source of distraction for the governing parties. Leaving aside tiny Valle d’Aosta, four of the other six regions are currently run by the center-left. The center-right is widely expected to maintain the control of the northern regions of Veneto and Liguria and could unseat the center-left in Marche and Puglia.