Italy’s Nascent Government Faces Tough Task Ahead

The Italian coalition taking shape 10 weeks after March’s inconclusive election has made economic promises that seem incompatible with Europe’s fiscal rules and will be hard, if not impossible, to keep.

These include slashing taxes for companies and individuals, boosting welfare provision, cancelling a scheduled increase in sales tax and dismantling a 2011 pension reform which sharply raised the retirement age, Reuters reported.

The marriage being sealed between the anti-establishment 5-Star Movement and the far-right League was seen as an unlikely and worrying prospect by most analysts before the March 4 election ended in a hung parliament.

The pre-election adversaries have spent the last few days trying to fuse their very different programs into a “contract” of mutually acceptable policy commitments. What they have in common is that they are extremely expensive.

On the face of it their plans, which they say may also include a form of parallel currency, could push the budget deficit far above targets agreed with the EU, setting up a clash with the European Commission and Italy’s partners.

“We will need to renegotiate EU agreements to stop Italy suffocating,” League leader Matteo Salvini said on Saturday after a day of talks with his 5-Star counterpart Luigi Di Maio.

5-Star’s flagship policy of a universal income for the poor has been estimated at around €17 billion ($20 billion) per year. The League’s hallmark scheme, a flat tax rate of 15% for companies and individuals, is estimated to reduce tax revenues by €80 billion per year.

Scrapping the unpopular pension reform would cost €15 billion, another €12.5 billion is needed to head off the planned hike in sales tax, and the parties are also considering printing a new, special-purpose currency to pay off state debts to firms.

“If implemented, it would be the biggest shake-up of the Italian economic system in modern times,” said Wolfgang Munchau, head of the London-based Euro Intelligence think-tank.

Some of the parties’ negotiators now suggest a more pragmatic approach will probably prevail, by implementing their pre-election proposals only partially and gradually. In the face of voter disappointment, each group will be able to say it was forced to compromise with its partner.