Welcome back. On Monday, Italy’s government announced a windfall tax on banks’ profits. On Tuesday, the government — startled by the overwhelmingly hostile reaction of bankers, investors and economists — rolled the measure partly back. Please find me at [email protected].
The biggest blunder
I’m going to stick my neck out and call this episode the biggest blunder of prime minister Giorgia Meloni’s government since her rightwing coalition stormed to victory in last September’s parliamentary elections.
The tax reflected “a combination of a lack of clarity and a complete volte-face in terms of policy”, according to Oliver Collin of Invesco, which is a shareholder in UniCredit, Italy’s second-biggest bank.
It was quite extraordinary that a measure of such importance should have been made public neither by Meloni nor by finance minister Giancarlo Giorgetti, but by deputy premier Matteo Salvini — and late on Monday evening at that.
In a damning verdict, Lorenzo Codogno, a former director-general of Italy’s Treasury and founder of LC Macro Advisers, told his clients that the initiative “risks producing permanent damage to the attractiveness of Italy’s economy”.
Parliamentary approval is still required for the windfall tax to take effect, and anyone familiar with Italy’s complicated legislative processes will know that the final version of the measure may end up even more watered down than it became on Tuesday.
But the significance of this week’s events goes beyond banks and windfall taxes. The incoherence and shortcomings of the Meloni government’s economic policies are now there for everyone to see.
In a nutshell, the government avoids serious economic reform, has no taste for market-based competition and panders to the voters and special interests that form the base of its support. As Codogno said, the windfall tax “comes from a right-leaning government that does not have a pro-market approach”.
This should come as no surprise. Precisely because Meloni’s government is composed to a large extent of the same coalition of rightwing parties that has often ruled Italy since the late Silvio Berlusconi burst on to the political stage in 1994, her administration is replicating many of the mistakes of those previous governments.
Applause for Meloni’s foreign policy
Since the Meloni government took office in October, however, much of this has gone under the radar. One reason is that, instead of concentrating on the coalition’s economic policies, many commentators have chosen to focus either on its foreign policy or on its rightwing cultural agenda at home.
With regard to foreign policy, Meloni has won much praise from Italy’s allies. She has been a staunch backer of Nato’s support for Ukraine. From a US point of view, she wins even more kudos for signalling that she may withdraw Italy from China’s Belt and Road Initiative.
We should indeed give credit where credit is due. In a country where some political parties — including the League and Forza Italia, two of the three in Meloni’s coalition — have displayed sympathy for Russia, she has done well to hold the line on policy over Ukraine.
Meanwhile, this New York Times article by David Broder, author of the recently published Mussolini’s Grandchildren: Fascism in Contemporary Italy, gives a flavour of how liberal commentators are highly critical of Meloni’s policies on immigration and gender issues.
An ‘invitation to tax evasion’
But any assessment of a government’s overall performance must take into account its economic record. This is all the more true for Italy, which has stagnated since the 1990s and is under permanent market scrutiny because of its high public debt, low growth and uncertain long-term prospects.
Despite having held office for less than a year, Meloni’s government has taken enough steps for us to doubt whether it is truly committed to advancing the programme of economic and administrative reform set out by Mario Draghi, the former European Central Bank president who was her much-admired predecessor as prime minister. In fact, the government is in certain respects reversing Draghi’s policies.
One example is the initiative, contained in Italy’s 2023 budget, to raise the ceiling for cash payments in transactions to €5,000, and to increase the threshold above which retailers can refuse bank card purchases. Le Monde, the French newspaper, quotes former Italian premier Enrico Letta:
“This budget law is like an invitation to tax evasion.”
Don’t open up the beaches
Next, consider the way Meloni’s government blocked efforts to liberalise the virtual monopoly that privately run clubs have on the stabilimenti balneari, or lidos, that are a defining feature of Italy’s beaches.
Draghi had planned to open up this sector, and the EU wanted changes, too. But the natural instincts of Meloni’s government, like those of Berlusconi’s administrations, go against promoting competition.
My third piece of evidence concerns amnesties for tax offenders. These were a hallmark of the Berlusconi era and — guess what — they popped up in the Meloni government’s budget, as outlined in this report by EY, the international consultancy group.
Repeated tax amnesties do nothing to redeem Italy’s reputation as a country where people who don’t pay their fair share of taxes get away with it because the government they vote for lets them off.
Another measure that suppresses competition is the Meloni government’s “reform” of public procurement law. The net effect of the change is to expand the range of contracts for which competitive tenders are not required.
Attacks on the ECB
All these measures have caught the attention of the European Commission, which in its latest report on the Italian economy observed:
“Frequent changes in tax policy increase uncertainty in the economy, making the tax system more complex and increasing the burden on compliant firms and households.”
A certain tension is evident in the Meloni government’s relationship with EU institutions. In June, she displayed complete disregard for the European Central Bank’s independence in monetary policy when she complained to Italy’s parliament: “The ECB’s simplistic recipe of raising interest rates does not appear to many as the correct path to pursue.”
Meanwhile, the EU has delayed releasing funds to Rome from its post-pandemic recovery programme because of questions over the kind of projects to which Italy has allocated money and over the government’s broader commitment to reform.
As the FT’s Amy Kazmin and Giuliana Ricozzi reported from Rome in May, these problems were foreseeable. Between 2014 and 2020, Italy spent just 34 per cent of the €126bn in EU cohesion funds available to it because of weak local administrative capacity and bloated bureaucracy.
Still ahead in the polls
It is striking that, despite the lack of reform and general weakness of the economy — which contracted in the second quarter — Meloni’s party, the Brothers of Italy, holds a comfortable lead in opinion polls.
There are many reasons for that, not least the disarray of opposition parties on the left.
But in terms of economic policy, the Meloni government is a severe disappointment. International investors and Italy’s allies should keep a close eye on this worrying trend.
Closer ties between Italy and the US rattle China — an article by Andrew Novo for the Washington-based Center for European Policy Analysis
Tony’s picks of the week
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Imports from China to the EU, including of sensitive technology and critical minerals, have increased in recent years despite European attempts to “de-risk” economic links with Beijing, the FT’s Valentina Romei reports
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Fifteen years after the 2008 war between Georgia and Russia, the question of whether it started on August 7 or August 8 is one of acute political sensitivity in the south Caucasus state, Joshua Kucera writes for Radio Free Europe/Radio Liberty
