Analysis
Italy vows budget cuts, admitting possible dual currency
In February, Italy plans to close tax loopholes and cut ministry budgets, surrendering to Merkel’s “two-speed Europe.”
Italy’s reply to Europe’s request for additional help — which, unofficially, is a firm no and, officially, Commission Vice President Dombrovskis and Economics Commissioner Moscovici are still “looking into” — is already in the trash. It was turned into confetti a few hours after it was sent, after Brussels gave it the business. It will be made official in February. But Brussels is already amply aware of the mild agreement reached in Rome.
The idea of a €3.4 billion discount as requested, by taking into account the expenses for the earthquake that occurred in January, is out of the question. The E.U. already said no. There will be some savings, but not as much as the half that was hoped for, only if the final 2016 budget, to be released in a month, will show that things have gone a bit better than expected and that GDP grew at least 0.8 percent more than budgeted.
As was announced in Italy’s request letter, three-fourths of the savings will come from new revenues and one-fourth from lowered expenses. More revenue means increased excise taxes: 2 cents more on gasoline for a total of €800 million, plus tobacco and others that will add up to €1.5 billion.
You could also add the billion generated by the measures against tax evasion, which were already announced by Padoan in the Senate, immediately after Brussels shot him down. The budget cuts, however, apply to one line only, the one the government had already spun from the very first moment, before sending the letter: cuts to ministries.
Europe will have to settle for a maneuver that has at least two questionable entries, by definition. One is the fight against tax evasion, which can never really be quantified in advance, and cuts to the ministries. However, without additional specifications, isn’t that too vague? Probably yes, because if the budget amounts to only partial certainties, then politically Italy’s surrender is total.
The days when Renzi tried to raise his voice threatening vetoes seem far away. Padoan commented on the high level of the spread, which actually dropped a bit Tuesday: 196 points compared to 201 points on Monday. Padoan sang the E.U.’s favorite song: “The events of recent days and hours remind us rudely that a country deep in debt cannot afford not to take care of its reduction.”
The change of position, compared to when the emphasis was always just on growth, laying the responsibility for the rise of debt on migrants and earthquakes, is eye-catching. Debt reduction as the top priority is the leitmotif that Europe wanted to hear. Without schisms or dissonant voices.
It is not only the fear of a very heavy penalty, which undoubtedly would have been given without this genuflection, that made the Italian government switched gears. In the background stands out the ”two-speed Europe” that Angela Merkel has announced, without specifying what it means.
Wednesday, the chancellor commented again on the subject, with the clear intention of reassuring, but she only succeeded up to a point. She guaranteed: “It should not be possible to create exclusive clubs where others cannot get in.” In short, any country that starts on the second tier can ask for a promotion, after meeting some requirements. But the chancellor did not utter a syllable about the real issue: Will the dual speed system also result in the adoption of a dual currency, like the hawks led by Finance Minister Wolfgang Schaeuble want? Or will the single currency be defended, as the ECB President Mario Draghi intends to do?
This is the reason of the battle to the death being fought in Europe. The renewed Italian insistence on the priority of debt reduction proves that the country is not at all certain that Draghi will win.
Originally published at https://ilmanifesto.it/padoan-tagliare-il-debito-in-arrivo-la-manovra-bis/ on 2017-02-08