"Promise everyone everything": Election campaign in Italy worries financial markets

After Greece, Italy is the euro member with the highest national debt. Nevertheless, the political camps promise expensive gifts before the election. Alarm bells are ringing on the financial markets. Experts warn: If the promises are kept, there is a risk of a debt crisis.

Italy’s right-wing alliance with post-fascist Giorgia Meloni, the centre-left party (PD) and the 5-star movement are politically far apart, but they also have one thing in common: before the parliamentary elections on Sunday, all three camps have costly voters promised gifts. They range from tax cuts to higher salaries for civil servants, earlier retirement dates and a “dowry” of up to €10,000 for teenagers once they turn 18.

The parties would “promise everyone everything,” criticizes Roberto Perotti, an economics professor at Milan’s Bocconi University. The alarm bells are therefore ringing on the financial markets. Finally, after Greece, Italy is the euro member with the highest national debt. It already accounts for around one and a half times the economic output. Already in the 2018 election, the politicians made generous promises – but also undertook to reduce the national debt, which was already high at 132 percent of gross domestic product.

“Debt is simply not discussed anymore throughout the Italian political class,” warns Tim Gwynn Jones, an analyst at the consulting firm Medley Advisors. After the election on September 25, they are likely to experience “a rude awakening” if the election winners try to implement their plans.

Italy’s borrowing costs are already rising steeply – driven by soaring inflation, the European Central Bank’s (ECB) interest rate hike and political uncertainty. Data from S

Lower taxes “for families, businesses and the self-employed” is the overarching promise of the program of the right-wing bloc made up of Giorgia Meloni’s post-fascist Italian brothers, Matteo Salvini’s Lega and Silvio Berlusconi’s Forza Italia. For example, a uniform tax rate on annual income of up to 100,000 euros for the self-employed and a reduction in VAT on energy and other important goods is planned. At the same time, the alliance promises to hire more health workers, facilitate early retirement and increase minimum pensions.

None of the promises are counter-financed. The election program also contains no reference to the consequences for tax revenue, debt or budget deficit. Analyst Jones laments that the parties enjoyed a “vacation from reality” during the 18-month unity government of outgoing Prime Minister Mario Draghi. They would have known that their country was partially protected by the former ECB chief’s credibility and by the ECB’s bond-buying programs. “Italian politicians assume that the ECB will always be there,” says Jones, meaning that if the worst came to the worst, it would buy government bonds and thus push down interest rates.

Economist Perotti took a closer look at the promises of the right-wing electoral alliance – which election researchers see ahead in polls. His conclusion: more than 70 would reduce income, and a good 50 would increase expenses. Overall, this would cost the state far more than 100 billion euros. “Even if they only enforce those that affect taxes and pensions, there will be a debt crisis,” warns the expert.

The Democratic Party’s 37-page election manifesto looks no less expensive. It includes the “dowry” for young people and an increase in net wages by the equivalent of one month’s wages per year, since the state is to take over the social security contributions currently borne by workers. The left camp also promises higher salaries for teachers and health workers, tax cuts for middle- and low-income earners, and the abolition of the regional business tax – promises that the 5-Star Party is picking up on.

Francesco Saraceno, economics professor at Luiss University in Rome and at Sciences Po in Paris, described the parties’ programs as “fairy tales”. These would have to be largely shelved soon after the election. He therefore sees little risk of a financial market collapse should the right-wing bloc come to power as expected. “I think there will be a brief negative reaction,” says Saraceno. “But then it will become clear that the new government will change very little in public finances – and the markets will calm down.”

Commerzbank chief economist Jörg Krämer thinks similarly. “The interest costs of the Italian state will increase only slowly, even if yields continue to rise,” says the economist. The reason: it takes some time before the comparatively low volume of new bonds with higher yields causes the average interest rate on Italian debt to rise. “More important than these fundamental reasons, however, is that the ECB has left no doubt over the past few years that it will not allow Italian yields to rise too much and the crisis triggered by it,” says Krämer.

For example, as part of their Pandemic Emergency Purchase Program (PEPP), the monetary authorities have primarily invested the proceeds from maturing bonds in Italian (and Spanish) bonds. In addition, with the Transmission Protection Instrument (TPI), it has created a new instrument to counter rising yields in individual countries. “A debt crisis is not likely – also because of the interventions of the ECB,” is Krämer’s conclusion.