The political scenario in Rome

Chigi Palace, Rome

Rome [ENA] Rome is supposedly close to signing a memorandum of understanding to join China's huge Belt and Road infrastructure initiative, making it the first G7 country to do so, according to Italian Press Agency ANSA (March 6). In this particular scenario the length of the Italian government will be affected by the new balance of power in Brussels after next European elections which will take place on 23-26 May 2019.

Actually, if the far-right joins a governing coalition with the EPP it will become more difficult for Salvini, leader of the League to go to a vote in the midst of the formation of the new European Commission (autumn 2019) where he might be one of the main partners. However, a coalition between EPP and far-right groups to govern Brussels today seems not the most probable outcome of the European elections. Moreover, in spring 2020 the government will appoint the new boards and CEOs of the three largest State-owned companies (ENI, ENEL, Leonardo) and the two parties might decide to go ahead with this government until that date in order to use their power of patronage and get their hands on the governance of strategic companies.

Italy has entered a technical recession, but the government has not drafted a plan to address the economic slowdown. The Minister for Economy and Finance has excluded the possibility of an amendment to the 2019 Budget Law in coming months. Moreover, the real impact on GDP of some measures is not clear, such as citizen’s income or the “flat tax”. Meanwhile new measures for growth are confidential in government desk drawers and they have not been unveiled to the public. Italian public debt, the largest in the Eurozone, remains high and currently there are no significant measures such as a spending review and privatizations or other strategies to reduce it. The issue is not part of the political agenda.

Moreover, the government approach is to bring the State back in some sectors such as, for example, airlines where the government is examining a possible nationalization of Alitalia, which is already supported by the State.The political influence of Salvini’s flat tax might have been undervalued by analysts with a view to the forthcoming European election. When he became Prime Minister, Matteo Renzi implemented the “80 euro” tax cut on personal income and his party surprisingly won more than 40 per cent of the votes at the 2014 European election. Furthermore, with hindsight it is possible to see that Silvio Berlusconi won many elections over the last two decades by promising or effectively reducing taxes on small and medium enterprises

and the self-employed. Now, in Italy a quid pro quo politics was always a good play. In 2019 the government has adopted a 15% flat-tax on self-employed gross income below 65,000 euros and in 2020 it will add a 20% flat-tax up to 100,000 euros. The measure is a flagship policy of the League and it will cover 80% of the self-employed in the country, which theoretically means millions of voters for Salvini. Indeed, the self-employed in Italy number 5.4 million, 23.2% of the total workforce, a much higher number than the EU average which is 15.7%.

In the past Italian commentators have taken too lightly the influence of tax cuts on this part of the electorate that is very sensitive to tax reform because the self-employed are those who suffered most in the economic crisis and with low growth. The flat-tax policy might fascinate people who used to vote Forza Italia or M5S. Its possible political effect should not be neglected. The government has to counterbalance 23 billion euro of safeguard clauses to respect EU rules in the next budget law. There is no clear set of options on how to manage the fiscal constraints. An increase in VAT or higher taxes on private assets it’s plausible.