2018-05-13

It's Official: Italy Swings Nationalist

May 2017: Italy's Turn to Try Populism
Europe can only dodge bullets for so long, and it only takes one victory to upend the apple cart. Once one nation acts in its self-interest, the pro-EU politicians who go along to get along will fall like dominoes. Nationalist sentiment is already high even in pro-euro and pro-EU countries.

Feb: Italy About to Turn Nationalist at Intermediate Peak in Social Mood
If you think the euro and European Union are out of the woods, that the populist wave has ebbed, think again. We are still part way through a decades long process. European nations are drifting in a nationalist direct despite social mood (measured by the market indexes) hitting new highs or at least multi-year highs.

March: Potential Euroskeptic Alliance Leading in Italian Exit Polls

One week ago it looked like the League would run from responsibility, but a blessing from Berlusconi led to a coalition with the 5-Star Movement.

Today at ZH: Italy’s 5-Star, League Reach Deal Clearing Way For "Anti-establishment" Government

What's on tap? Budget deficits galore, the middle finger to the ECB, more deficits, tax cuts, and deportations of migrants:
To be sure, what happens next is unclear as Italy's soon-to-be-governing coalition has made economic promises that seem incompatible with Europe’s fiscal rules and will be hard, if not impossible, to keep or even implement. These, as Reuters details, include:

slashing taxes for companies and individuals
boosting welfare provision
cancelling a scheduled increase in sales tax
dismantling a 2011 pension reform which sharply raised the retirement age


Yet while these two pre-election adversaries spent the last few days trying to meld their very different programs into a “contract” of mutually acceptable policy commitments, what they have in common is that they are extremely expensive.

On the face of it their plans, which they say may also include a form of parallel currency, could push the budget deficit far above targets agreed with the EU, setting up a clash with the European Commission and Italy’s partners.

“We will need to renegotiate EU agreements to stop Italy suffocating,” League leader Matteo Salvini said on Saturday after a day of talks with his 5-Star counterpart Luigi Di Maio. Separately, 5-Star’s flagship policy of a universal income for the poor has been costed at around 17 billion euros ($20 billion) per year. The League’s hallmark scheme, a flat tax rate of 15 percent for companies and individuals, is estimated to reduce tax revenues by 80 billion euros per year.

That's just the start of the new costs: scrapping the unpopular pension reform would cost 15 billion euros, another 12.5 billion is needed to head off the planned hike in sales tax. But the biggest wildcard is that the parties are considering printing a new, special-purpose currency to pay off state debts to firms.
A blue print for the U.S.A. when Bernie and Trump supporters eventually meet in the middle. Destroy the currency! But in the case of Italy, that's not merely hyperbole or a description of high levels of currency depreciation, but a literal description of what could happen to the euro. At least in Italy.

DXY > 120
USDCNY > 8.00
EURUSD < 1.00

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