Italian Prime Minister Giorgia Meloni.
Antonio Masiello | Getty Images News | Getty Images
After plunging into the political mainstream and winning over her more moderate counterparts in Brussels, hardline Italian Prime Minister Giorgia Meloni is now shaking things up on home soil.
Europe’s essential banking index dropped some 2.7% on Aug. 8 after Italy announced it will impose a 40% windfall tax on banks. The surprise move, which clearly caught traders off guard, was toned down inside 24 hours.
Airlines have rebuffed other policy measures, with a latest government plan to curb prices when flying to certain destinations. The Italian government is meeting airline executives next month and the European Commission, the chief arm of the EU, is already assessing whether the measure would comply with EU law.
Meloni was elected in October and, in addition to being the country’s first female PM, can be the primary from a far-right party for the reason that end of World War II. To this point during her mandate, Meloni has largely fallen according to mainstream political positions at home and abroad, despite concerns from some that she may push her country to the fringes. She has not been at odds with officials on the European Union, for instance. She has also made sure Italy has been a key supporter of Ukraine within the wake of Russia’s invasion of Ukraine, despite the indisputable fact that a few of her cabinet members have had close ties to the Kremlin.
Federico Santi, a senior analyst at consultancy Eurasia Group, told CNBC via email that her backtrack on the windfall tax “was a significant misstep, in perception and substance.”
“This poorly-thought through measure was an abrupt reminder that Meloni’s government is principally made up of right-wing populist parties, with a track record of erratic economic policy-making,” Santi said, adding nevertheless that he expects Meloni to “stay the course” on the basic features of presidency policy.
Erik Jones, a professor on the European University Institute in Italy, told CNBC he didn’t consider this was a more “populist” government than that witnessed over the past 12 months, with Meloni and her finance minister, Giancarlo Giorgetti, attempting to spend without running up huge deficits.
“On fiscal policy, even within the absence of binding EU rules, which remain suspended, the federal government has made efforts to proceed a gradual fiscal adjustment, according to EU recommendations – i.e. by keeping the deficit and debt on a, slowly, declining path and avoiding broad-based expansion that would feed inflation,” Eurasia Group’s Santi said.
Italy’s government debt-to-GDP stood at 144.4% in 2022, in accordance with data from the International Monetary Fund. That is expected to drop to 140.5% this 12 months and nevertheless to 138.8% in 2024. The Italian economy is seen growing at a rate of 1.1% this 12 months and 0.9% in 2024, in accordance with the IMF. This represents a fall from the three.7% gross domestic product registered in 2022.
What to look at out for
Despite the overall expectation that the Italian government is unlikely to go down any more controversial avenues, analysts have mentioned two events that international investors should keep a detailed eye on.
“Investors should worry in regards to the turmoil that’s more likely to surround this upcoming budget. There can be quite a lot of room for controversy that can create volatility. But I don’t think that the essential policy will change or that the federal government will collapse,” Jones from the European University Institute said.
Governments across the EU should submit their budgetary plans for the brand new 12 months in October so the European Commission can assess whether or not they comply with EU rules. Previously, this process has raised tensions between Brussels and Rome.
For others, nevertheless, the most important risk is a delay in receiving certain EU funds.
“This can be a key factor underpinning public investment and growth through 2026, with vital knock-on effects on the fiscal outlook,” Santi said.
The EU funds in query were agreed to at the peak of the Covid-19 pandemic given the tumult and slowdown across the European economy. Italy’s the largest beneficiary of the 750 billion euro program ($814 billion) on condition that its economy was the worst hit by the pandemic and resulting lockdowns. Nevertheless, disbursements only occur after nations recommend certain measures and reforms.
The sheer volume of funds could make a critical impact on Italy’s economy.
“These delays are, for probably the most part, not the federal government’s own making, and Meloni stays intent on meeting NextGenEU commitments on paper — but external issues, high input costs, supply chains strain; and serious administrative shortfalls and bottlenecks will increasingly prevent the federal government from meeting its investment targets,” Santi added.