Italy’s Deputy Prime Minister Matteo Salvini escalated the ongoing standoff between the EU and Italy, saying he would bring down the government if the coalition’s budget deficit target was changed.
The remarks by Salvini, Italy's de facto leader who has been enjoying a steady climb in public opinion polls as he has continued his hardline negotiating approach with the European establishment, were quoted by newspaper La Repubblica hours before the country’s prime minister, Giuseppe Conte, was scheduled to make an attempt in Brussels to convince the European Commission that the country’s budget is sound. That, as is widely known by now, include the 2.4% deficit goal for 2019 that has become a lightning rod for Commission objections.
"The 2.4 percent deficit target can’t be touched, otherwise I will bring down the government,” Repubblica quoted Salvini as saying in a telephone call to Conte. The report said Salvini was willing to make only minor concessions in next year’s spending plan.
For Savlini the threat of new elections poses little downside risk: according to a recent poll, most Italians view Salvini, the outspoken leader of the anti-immigrant League party, as the real head of government, with just one in six casting Prime Minister Giuseppe Conte in that role. The monthly survey in La Repubblica newspaper showed 58% considered Salvini the leader, while 16 percent picked Conte and 14 percent chose Luigi Di Maio, who heads the anti-establishment 5-Star Movement and is the co-head of the coalition government. Salvini and Di Maio are deputy prime ministers in Conte’s coalition government, which took office in June and which the Demos poll found that 58 percent of respondents support.
Since then, Salvini has continued to pull ahead of Luigi Di Maio, the country’s other deputy premier, as the public face of hardline opposition to the EU. Salvini’s League party rose to 36.2% in voter intentions in November, the fourth straight poll showing an increase, according to an Ipsos survey in newspaper Corriere della Sera. Five Star, which emerged as the biggest single party in March’s general election, slipped to 27.7% this month, from 28.7% in October.
New elections would therefore only further entrench the anti-establishment Salvini, cementing his negotiating position vis-a-vis Brussels.
In an attempt to boost his approval Di Maio, meanwhile, ruled out shrinking the number of people who would benefit from the government’s welfare and pension reforms, though he reiterated the government would look at ways to cut more waste and raise money by selling some key assets, according to Bloomberg citing news agency Ansa. According to La Repubblica, he is in agreement with Salvini on possibly shifting up to 4 billion euros ($4.5 billion) from other parts of the budget for more investments.
Meanwhile, Italy’s budget plans and spat with the European Union have roiled its bond and stock markets in recent weeks. Some, such as Fitch, have warned that Salvini's threat is in fact the biggest risk facing Rome, namely that Italy's government may not survive.
Early in November, the head of Fitch's sovereign ratings, James McCormack, warned that uncertainty involving Italy's coalition government is as great a risk for BTP investors as the budget for the simple reason that the government may not survive as its members are "too different." Speaking on Bloomberg TV, the Fitch strategist said that there are not many things that the coalition partners agree on, and that raises questions about the government's survival.
"We are not convinced that this coalition government is actually going to survive. It has very different coalition partners" and there are "not many things that they agree on", McCormack said.
"Then the question becomes: what happens then? Political uncertainty is not finished in Italy,” he added, expecting Italian political fireworks to continue well into 2019. As a reminder, there is a November 30 deadline for the Italian budget to be approved by European Commission, which then has to pass Italy's parliament by December 31, with an April 30 "Plan B" extended deadline for Italian approval.
The Fitch analyst also said that if yields on Italian bonds go higher - whether with the active involvement of the ECB, which can be quite convincing as Berlusconi recalls all too well, or without - "this could force the Italian government to think of a different strategy." Unless, of course, the contemplated strategy is precisely that of government collapse, which would fall right into Salvini's hands.
While the standoff between Italy and Europe remains in the jawboning phase for now, the upcoming sequence of events will necessitate actions, and should the refusal to compromise by either Salvini of the EU continue, it is likely that the Italian "bond vigilantes" will have no choice but to send the spread between Italian and German bonds beyond 400bps, which the government has previously warned would be the "red line" for local banks, potentially triggering a deposit run among the Italian population which while entertained and enjoying the standoff between Savlini and Brussels, may soon grow more concerned about the safety of money it has saved in the bank.