Italys not the new Greece. Its the new Argentina.
MILAN — The Italian governments decision to bust the deficit limits it had agreed with the European Union is depressing. But its not surprising.
Its not just that Rome is now governed by a grand coalition of extremists: Interior Minister Matteo Salvinis far-right League and Economic Development Minister Luigi Di Maios anti-establishment 5tar Movement.
For years, Italian politicians have portrayed the countrys fiscal constraints as the result of foreign machinations — unfair limitations imposed by Brussels or Berlin.
Right-wingers have portrayed the financial storm that ousted then Prime Minister Silvio Berlusconi in 2011 as a conspiracy. Italys rising cost of borrowing, they claim, was somehow weaponized to drive out one of the few politicians who stood up to Germany.
More recently, former Prime Minister Matteo Renzi demanded, and obtained, “flexibility” over Brussels-mandated budget constraints, thereby undermining the legitimacy of fiscal rules.
Salvini and Di Maio both champion a vulgar form of Keynesianism: a blind preference for government spending, regardless of the macroeconomic outlook.
Indeed, his center-left Democratic Partys electoral program promised a budget deficit of 2.9 percent — quite a bit higher than the 2.4 percent deficit the government unveiled Thursday night.
Renzis rhetoric portrayed the negotiation over budget limits as a diplomatic skirmish with the European Commission — a framing that plays into the hands of the populists in charge of the country today.
Seen in this light, a bigger deficit is proof that Italy is staring down the European technocracy — never mind the consequences for the countrys finances over the long term.
Italys government is made up of strange bedfellows. The League is primarily concerned with restricting immigration. The 5Stars lean left; their key campaign promise was a “citizens income” for the poorest of Italians, one they partially delivered on by busting through the EUs spending constraints.
Luigi Di Maio (left) and Matteo Salvinis view on government spending is troublesome for the long-term health of the economy | Alberto Pizzoli/AFP via Getty Images
For now, the two parties have squared their differences by agreeing to spend more freely.
At least in Renzis times, laxer public finances were seen as a necessary counterpart to supply-side reforms. Now bigger deficits are good in themselves.
Salvini and Di Maio both champion a vulgar form of Keynesianism: a blind preference for government spending, regardless of the macroeconomic outlook.
This has dire consequences for the long-term health of the economy.
Italys cost of borrowing has roughly doubled since the government took power last spring. This is a serious matter in a country where the public debt is over €2.2 trillion or 132 percent of GDP. It also translates into a higher cost of credit for households and businesses.
This is particularly troublesome for the enterprising, productive part of Italy: In short, the Leagues stronghold in the north.
People tend to overestimate the immediate benefits of government spending and underestimate what it may cost them in the long run.
Perhaps because they lack a credible alternative now that an aging Berlusconi has been marginalized, Italys northern entrepreneurs support the League. But the truth is that while they are getting the tougher immigration policy they desire out of the deal, theyre not getting much else.
To the contrary, the government has suggested reducing the flexibility of the labor market, renationalizing the highway system and forcing shopkeepers to keep their doors closed on Sunday.
How long will the northern businesses continue to support the government? It is hard to say.
The reasons behind Italys economic stagnation have been well known for decades: an inflexible labor market, excessive spending and taxation, over-regulation. But no government in the past 15 years has been able to push through anything but inconsequential reforms.
Its possible that the budget unveiled this week reflects an underlying acceptance among Italys political and business classes that the country is simply incapable of reform — that Italys descent into a Latin American-style struggling economy is now inevitable.
People tend to overestimate the immediate benefits of government spending and underestimate what it may cost them in the long run.
This time the problem may be even worse. The government isnt just proposing a quick pop of deficit spending, followed by belt-tightening later on — a common pattern in Italy.
Higher deficit spending isnt an extraordinary measure. The government intends it to be the new normal.
Alberto Mingardi is director general of Istituto Bruno Leoni in Milan, an adjunct scholar at the Cato Institute and a presidential fellow at Chapman University.
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