‘We Do Not Think Markets Will Appreciate This’: Italy’s Populists Successfully Blow Up Budget

A deal has been reached by the full government on 2.4% [of GDP]. We are satisfied. It’s the budget for change.

That’s a quote from a joint statement issued by League leader Matteo Salvini and Five Star chief Luigi Di Maio and it’s characteristically misleading.

Italian assets came under pressure on Thursday when Salvini and Di Maio made a last-minute push for a more expansionary budget over the objections of Finance Minister Giovanni Tria, who attempted to draw a line in the sand at 1.9%.

As you can see from the quote here at the outset, Tria lost the battle.

This was predictable. The appeal of populism lies in the promise of short-term fixes for complex problems and in Italy (as in the U.S.) delivering on that promise entails reckless fiscal policy.

It matters not to Salvini and Di Maio whether Italy is on a sustainable fiscal path. All that matters is making good on unrealistic promises to disaffected voters whose fears and prejudices were exploited by populism for political gain.

Over the past several weeks, the market appeared willing to give Italy’s new government the benefit of the doubt on the budget despite frequent reminders from the populists that they are fully prepared (and perhaps even excited about) a showdown with Brussels.

Italy may think they can simply blackmail the E.U. by effectively raising the specter of a financial crisis in an effort to secure some manner of implicit or explicit guarantee from the ECB. Late last month, rumors began to swirl that Italy would ask the central bank for a BTP-specific extension of QE in order to ensure the wind down of ECB asset purchases didn’t exacerbate pressure on Italian bonds.

If that sounds absurd to you, that’s because it is.

Italy’s populists want to flout E.U. budget rules while simultaneously demanding that the ECB print euros in order to prevent the market from punishing the country’s leaders for fiscal profligacy. In other words, Italy’s new government wants to flip the E.U. the bird with one hand and beg for a handout with the other.