By Silvia Marchetti
ROME (Mace News) – Italy is facing the risk of a new sovereign debt crisis if a rightist win at the next election prevents formation of a stable pro-European government with a credible fiscal plan, according to current ruling coalition sources.
Meanwhile, spreads have blown out as polls show overwhelming odds that a rightist coalition will come to power with plans to defy European Union fiscal rules.
Outgoing coalition officials warned that the rightist parties that would likely form a new majority – the League, Brothers of Italy and Forza Italia – are failing to reassure financial markets at a very delicate moment.
“Their potential rise to power coincides with the end of the European Central Bank’s accommodative policies and the recent hike in interest rates. Low interest rates have so far shielded Italy’s high public debt but what will happen next is uncertain and risky,” said a Democratic official.
“A rightist cabinet will boost market instability and debt costs, alongside spread levels which have already been rising since Mario Draghi quit,” added another source.
The likely leaders of a rightist coalition would be the League, led by Matteo Salvini, Brothers of Italy by Giorgia Meloni, and Forza Italia by Silvio Berlusconi, who would divide among themselves key ministries and positions.
Polls show Meloni’s party ahead with 24 percent backing among likely voters in the Sept. 25 election, which has pushed the spread up to 226 basis points in recent days over concerns she might be the next premier.
The right-wing parties want a total overhaul of European fiscal rules, particularly of the Stability and Growth Pact with the 3 percent deficit-to-GDP threshold, and push to give more power to national states by boosting ‘sovereignty’ on key strategic issues as opposed to greater European integration for which the EC is pushing.
Both the populist League and the hard-right Brothers of Italy, leading in polls, want to scrap the EU’s debt rule, known as Fiscal Compact, that limits spending and forces governments to reduce public debt by a specific amount each year.
It is still too early to know what the rightist parties will actually do in power as their program is still to be defined in the upcoming budget law for 2023. But the rightists will definitely scrap the 5 Stars‘ citizenship wage, a free income given to all unemployed just because they are Italian and seen by the right as a waste of public money.
No scenario sees any other coalition as potential winner at the elections — it is just a question of ‘margin’, argued a source. The only question is how large their majority will be, and whether theirs will be a stable government.
Italy has the EU’s second-largest debt after Greece, but as opposed to Greece, it is the third-largest EU economy and has the power to trigger a debt-linked domino effect across the union, said the Democratic official.
A League official said the party was eager to raise deficit spending by at least €40 billion as soon as they rise to power, which would further way on Italy’s pandemic-piled debt.
“We need to assure that families and firms are protected by rising inflation and energy costs so we will do whatever it takes to support them,” said the League official.
The Brothers of Italy party which leads all polls but would still need to team up with other right-wing parties to rule, has sent out mixed messages on their European stance that are failing to reassure markets.
Also, future market reaction will largely depend on how credible a potential rightist alliance really is and whether it will last in time, given allies who should stick together during the electoral campaign are already at odds over spending plans and growth priorities.
Ruling coalition sources argued that the spike in the spread in recent weeks, and the volatility of the Italian stock exchange proved that markets aren’t confident the upcoming vote will deliver a coalition “fit to rule.”
One source argued Italy’s recent financial market sell-off indicated financial investors were starting to flee, while in the past two years foreign investments in infrastructures, local projects and businesses had already dropped by nearly 65 percent.
“There’s also another key issue to consider: Italy is only half-way through its issuance target for this year, and will inevitably be borrowing money at a very much higher cost than six months ago with a government that does not reassure markets,” said the Democratic official.