Italy’s Gamble: Why The New Economic Strategy Is Needed

It is still better to jeopardize resources to provide investments and social security than to leave Italy motionless

By Michele Paolo

Italy’s recent financial measures are considered by the governement as a way to turn the tables in the European Union, which is accused of limiting economic growth and room for investments. In fact, the Economic and Financial Document (DEF), the main instrument for financial and economic planning in Italy setting out public finances and economic strategies for the next three years, as updated provides for an increase in the deficit – GDP ratio of 2,4 percent, causing growing concern for international stock exchanges. Can the Italian government led by prime minister Giuseppe Conte really turn the economy around by raising public expenses?

After the cabinet council passed the DEF on September 27, a lot of criticism arose from the opposition parties and the European Union, due to the great expenses that the two majority leaders Matteo Salvini (Northern League) and Luigi Di Maio (Five Star Movement) foresee in order to stick to the commitments undertaken during their electoral campaigns. On the other hand, the government parties assume that the new DEF will be able to start over a new season of economic and social growth. But what are the main points of these measures?

The citizen’s income

The main provision to stand out is the so-called “citizen’s income”. In other words, a subsistence policy whose goal is to guarantee an income of approximately 780 euros to every person earning revenues under the poverty limit. According to the promoters of this action, the Five Star Movement, poor people would be included again in economic and social activities, as the supporting income will be dispensed at two conditions: the recipient must not only provide proof that he or she attends training courses for job placement, but is also obliged to accept one of the first three job offers coming from the local job center. Owing to these circumstances, the DEF provides money to strengthen the public job service.

Flat tax

Another measure regards the introduction of a new taxation system named flat tax. According to the deputy prime minister Matteo Salvini, the chief of the other governmental party sponsoring the imposing reform, the Northern League, a new single rate of 15 percent will be adopted for every independent business. This plan aims to ease fiscal compliances, which in Italy are tremendously cumbersome, so that not only new businesses may arise, but also to let existing firms have more resources to invest, generating thus further employment.

The pension reform

The last main point concerns the pension reform. It is generally true that young Italians hardly find a way into a job; while this phenomenon has many causes, it is unquestionably true that the currently high retirement age hinders young people to draw their path into the labour market, as older people need to work more in order to gain a fair retirement benefit. The government would like to stop this vicious circle by imposing a new retirement system (Quota 100): all workers could then retire at 62 years old with a contribution of 38 working years.

A tremendous shock

While all these measures look great in theory, as they would really be a tremendous shock for a restricted economy like Italy, it is also true that there is an undisputable lack of resources. Although Italy has respected the limits of the 3 percent deficit – GDP ratio imposed by the European Union in order to make European financial statements more balanced, it should be considered that the Italian public debt is dreadfully high, representing approximately the 130 percent of the GDP.

As a consequence, one of the prime objectives of the Italian government should be to reduce public expenses. That is the reason why Italy has seen the spread ratio (namely, the difference in return between the Italian BTPs and the German BUNDs — the two countries’ 10-years treasury bonds —, the latter being considered the safest in Europe) increase dramatically up to 300 points in October (being 114 in April). That being so, stock exchanges are worried about the fact that the Italian government is going to raise public expenses, making paying debts harder.

Investments and social security are needed

Although Italy needs a shock in order to bounce back and ensure greater social and economic equity, it looks like the DEF is hugely risky. Indeed, if the executive does not succeed in providing a new era of wealth, the new generations will carry out the burden of new expenses, meaning that more taxes are meant to be paid. Nevertheless, it is still better to jeopardize resources to provide investments and social security than to leave Italy motionless.