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Italy's Not the New Greece. It’s the New Argentina.

October 1, 2018 in Economics

By Alberto Mingardi

Alberto Mingardi

MILAN — The Italian government’s decision to

bust the deficit limits
it had agreed with the European Union
is depressing. But it’s not surprising.

It’s not just that Rome is now governed by a
grand coalition of extremists
: Interior Minister
Matteo Salvini
’s far-right League and Economic
Development Minister Luigi Di Maio’s anti-establishment 5tar
Movement.

For years, Italian politicians have portrayed the
country’s fiscal constraints as the result of foreign
machinations — unfair limitations imposed by Brussels or
Berlin.

People tend to
overestimate the immediate benefits of government spending and
underestimate what it may cost them in the long run.

Right-wingers have portrayed the financial storm that ousted
then Prime Minister Silvio Berlusconi in 2011 as a conspiracy.
Italy’s rising cost of borrowing, they claim, was somehow
weaponized to drive out one of the few politicians who stood up to
Germany.

More recently, former Prime Minister
Matteo Renzi
demanded, and obtained, “flexibility”
over Brussels-mandated budget constraints, thereby undermining the
legitimacy of fiscal rules.

Indeed, his center-left Democratic Party’s electoral program
promised a budget deficit of 2.9 percent — quite a bit higher
than the 2.4 percent deficit the government unveiled Thursday
night.

Renzi’s rhetoric portrayed the negotiation over budget limits as
a diplomatic skirmish with the
European Commission
— a framing that plays into the hands
of the populists in charge of the country today.

Seen in this light, a bigger deficit is proof that Italy is
staring down the European technocracy — never mind the
consequences for the country’s finances over the long
term.

Italy’s government is made up of strange bedfellows. The
League is primarily concerned with restricting immigration. The
5Stars lean left; their key campaign promise was a
“citizen’s income” for the poorest of Italians,
one they partially delivered on by busting through the EU’s
spending constraints.

For now, the two parties have squared their differences by
agreeing to spend more freely.

At least in Renzi’s times, laxer public finances were seen as a
necessary counterpart to supply-side reforms. Now bigger deficits
are good in themselves.

Salvini and Di Maio both champion a vulgar form of Keynesianism:
a blind preference for government spending, regardless of the
macroeconomic outlook.

This has dire consequences for the long-term health of the
economy.

Italy’s cost of borrowing has roughly doubled since the
government took power last spring. This is a serious matter in a
country where the public debt is over €2.2 trillion or 132 percent
of GDP. It also translates into a higher cost of credit for
households and businesses.

This is particularly troublesome for the enterprising,
productive part of Italy: In short, the League’s stronghold in the
north.

Perhaps because they lack a credible alternative …read more

Source: OP-EDS

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