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In Italy, the latest polls all give the far right the winner in the legislative elections on Sunday 25 September. This prospect is fueling tensions in the debt market. Can the peninsula, and the entire euro zone with it, tip over into a new debt crisis?
Italy remains the second most indebted country in the euro zone, after Greece, and it will undoubtedly be subject to severe turbulence on the debt market if Giorgia Meloni, the head of Fratelli d’Italia, succeeds Mario Draghi. The former president of the ECB had the legitimacy to reassure the markets. Fratelli d’Italia, or Brothers of Italy, today at the top of the polls, is on the contrary worried: it is a post-fascist party with an anti-European DNA. Italy’s debt now represents 150% of its GDP. This is much more than in 2010, during the last debt crisis that rocked the euro zone. And the Italian government’s ten-year borrowing rate is soaring, reaching 4.2% yesterday. The gap with the German rate could very quickly widen and enter the critical zone of 250 points. A threshold considered explosive. First there is therefore a real danger for the euro zone as a whole.
But there are also notable differences with 2010
First, the ECB has a new tool to support a specific country. Secondly, the Italian economy is now in much better shape. It is the eurozone country that experienced the best growth in the second quarter. It is much stronger than twelve years ago to withstand a debt crisis. This is the conviction of the economist Julien Marcilly of GSA. He points out that Italian companies, large and small, have become accustomed to self-financing rather than borrowing from banks, so the latter are less exposed to the risk of bankruptcy. Another reassuring sign: the banks are well capitalized. With a nuance: they still hold a large portion of Italian debt, so they will be weakened in the event of a crisis. Then the economic rebound is fragile; the energy crisis is deteriorating its external balance, and corporate productivity could suffer in the medium term from tensions in the labor market.
Is Giorgia Meloni’s very patriotic speech compatible with the European agenda?
His electoral discourse is very patriotic and very populist. By joining forces with Silvio Berlusconi’s Forza Italia and Matteo Salvini’s Northern League, the post-fascist party advocates drastic tax cuts with a common rate for all households, and makes many promises of new spending to help pensioners or the inhabitants of the poor regions of the South. Without presenting the precise measures to finance them, there is enough to make the budget deficit very quickly get out of hand. Especially since current expenditure is already exploding financing needs. This is enough to fan the embers of a debt crisis. Italy is one of the main beneficiaries of the post-Covid recovery plan: 200 billion euros have been allocated to it. However, payments could be suspended if the government that emerged from the polls does not carry out the reforms requested.
The favorite of the polls will take this risk?
It is not in the interest of his country, and it is probably not what the Italians want; even if they are preparing to give a majority to an anti-European party, the majority of Italians are very attached to the euro and its institutions, according to all the polls. Far from wanting to cross swords with Brussels, Giorgia Meloni seeks on the contrary to reassure by multiplying the leaks in the press on her regular exchanges with Mario Draghi. The current holder of the Ministry of Finance could even stay in his post. He denied it but the rumor reassured business circles. The day after the election, the allocation of this strategic portfolio will be the real test of his intentions.