Summary

The first budget from Italy’s anti-establishment coalition government is expected to land on Thursday evening. Reaching an agreement has been a difficult process given the oft-contradictory policy goals of the coalition partners, and these disagreements have become glaringly evident in the run-up to the budget deadline.

The stakes in this couldn’t be higher. The new Italian government has inherited a mountain of debt that leaves little room for error, and a new run on Italian bonds risks triggering another cascading financial crisis for European banks.

Background

The League and M5S have always made for strange bedfellows on policy, with the League favoring a belt-tightening approach via lowered income taxes and M5S championing new welfare spending, namely a universal ‘citizen’s income.’ Both want to roll back 2011 pension reforms which raised the retirement age from 58 to 66. Though the reforms have saved the government billions of euros since being implemented, they are roundly detested in Italian society and were a key focal point in the general election.

Italy’s debt outlook doesn’t allow for any bold new spending initiatives. The public debt currently stands at 131% of GDP – the second highest in the EU behind Greece. Rome reported a fiscal deficit of around 2.4% in 2017, and missed its fiscal targets for 2017 and (quite likely) 2018 as well.