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Italy's anti-poverty budget sends markets into frenzy

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FILE PHOTO: Interior Minister Matteo Salvini talks with Italy's Minister of Labor and Industry Luigi Di Maio at the Quirinal palace in Rome, Italy, June 1, 2018. REUTERS/Tony Gentile/File Photo

Italy's new anti-poverty budget sent markets into a frenzy on Friday. The Milan stock exchange plunged four percent, suffering its worst day in two years after the coalition government announced plans to increase the budget deficit to 2.4 percent of GDP, risking conflict with Brussels.


"I do not think that the European Commission can nod and accept the budget as it is," Guntram Wolff, director of Brussels-based think tank, Bruegel, told RFI, after Italy's populist leaders announced plans to increase the budget deficit to 2.4 percent of GDP in the next three years.

The European Commission on Friday responded with a stern warning to the govenrment, a coalition of the far-right League and the anti-establishment Five Star Movement, not to exceed the zone's 3.0 percent limit.

Deputy Prime Minister Luigi Di Maio replied that Rome was not seeking a clash with Brussels and would "pay back the debt".

“There is an accord within the whole government for 2.4 percent, we are satisfied, this is a budget for change,” Di Maio and fellow deputy prime minister Matteo Salvini said in a joint statement.

Yet for Wolff, "the budget of 2.4 percent is an unwise increase in the deficit at the moment, where Italy's growth situation is not so bad and employment creation is actually happening."

Defying Brussels

The budget decision follows weeks of suspense over whether western Europe's first anti-establishment leadership would defy Brussels and uphold their costly electoral promises.

A "citizen's income" was a key campaign promise byFive Star's Di Maio and the League's Salvini.

The means-tested basic income, which will cost 10bn euros,  will give 6.5 million of the poorest Italians 780 euros per month.

“For the first time in the history of this country we will erase poverty thanks to the basic income,” Di Maio said on Facebook. “We will finally give a future to the 6.5 million people, who until now have lived in poverty and been completely ignored.”

"My concern is that we are going to burn billions of euros in terms of interest rates, in terms of interest paid on our public debt in the next weeks," warns Piercamillo Falasca, member of pro-European party, +Europa.

"They are not implementing measures aimed to push the Italian growth, they are just implementing an electoral set of measures in order to win the next European elections and that is very irresponsible," he told RFI.

Di Maio defended the budget, saying that, for the first time, "the state is giving to the people, not taking away."

The budget contains measures to boost growth, he argued.

Investment doubts

Many investors Friday dumped their Italian shares and government bonds in panic, widening the gap between Italian and German yields.

"Of course; if the spread goes up, this will translate not only in more expenditure in interest rates for the public finances but also in more expenditure for firms and individuals to take loans," says Marco Leonardi, an economics professor at the University of Milan.

He warned that higher spending will hurt tax-payers.

"What the people have not understood yet is that at the end it will be workers and the middle class who will pay," he told RFI.

Wolff claims it will make investment in Italy harder.

"It sends a signal to financial markets that the long-term commitment of the Italian government to debt sustainability is not guaranteed anymore," he said.

Debt burden

The spending splurge will further inflate the country's mammoth debt burden, currently 131 percent of GDP, the biggest in the eurozone after Greece, raising fears of a ticking time-bomb.

"There are some buffers, leeway to manage the situation, but it's also true that if it lasts for long, very quickly we are in a crisis mode," says Wolff.

Rome's debt crisis is not new.

For 20 years governments have tried various measures to increase growth - flexibility packages with Europe, austerity in 2011-2012, then borrowing 30 billion euros from the EU to stay afloat.

"What we can do to solve Italy's problem are not knee-jerk reactions but longstanding policies," inisists economics professor Leonardi.

Right now, the government has the backing of Italians, tired of years of austerity.

"They voted against fiscal compact, European discipline, so they are quite sensitive to this propaganda," comments pro-EU member Falasca.

"They're still living the honeymoon with the government, which is why the government feels strong enough to afford this kind of confrontation with the European Union," he says.