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May 08, 2019

How to think about Italy's fiscal position in 2020

We have found that clarity of vision about the state of the eurozone economy is inversely related to over-reliance on economic forecasts and confidence indicators. It is for this reason that we don't usually report on either and, if we do like today, then it's mostly to question other information and our own expectations. 

When assessing Italy's budget deficit going forward, yesterday's forecast of 3,5% by the European Commission for 2020 is a relatively uncontroversial baseline case premised on historical information. But it does not tell us what we need to know. In particular, it does not capture the two conflicting dynamic elements that could push us far away from the baseline: a positive growth shock and further fiscal relaxation. 

As we have been arguing before, the fiscal multipliers in Italy are probably much larger than generally assumed, especially coming after a long period of fiscal consolidation. This would suggest that fiscal expansion could have an unusually strong growth effect. We cannot be certain that this is so, but it would be consistent with the recorded 0.2% qoq increase in Italian GDP during the first quarter. This was probably one of the biggest recent data surprises, and that information was not yet available when the Commission computed its forecast. In the absence of a global economic shock, it is conceivable that the growth rates both for the eurozone and for Italy could exceed expectations by quite some margin. The Commission forecasts Italian GDP growing at 0.1% for the entire year - already exceeded in Q1 - and 0.7% in 2020.  

The biggest uncertainty of all remains Italian politics after this month's European elections. The forecast does not take into account yet-to-be-agreed income tax cuts as demanded by the Lega. If the Lega's election results are as good as expected, its relative power inside the government would strengthen. In this case we would expect no efforts towards a Maastricht-compliant Italian EU budget for 2020, resulting in a renewed excessive deficit procedure. There are several political scenarios. One of them is an election in September. In this case the country is unlikely to have a government and a 2020 budget in place for the looming EU fiscal deadlines in the autumn. It is also possible, but not certain, that a centre-right majority government or a Lega minority government would be fiscally more conservative than the current coalition.

The European Commission's current forecast makes the assumption that the automatic increase in VAT is not going to happen. 

We also note the Commission's estimate of a rise in the debt-to-GDP level from a projected 133.7% this year to 135.2% in 2020. What the forecast confirms, and what we knew before, is that the combination of weak economic growth and the country's fiscal position is not sustainable.

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May 08, 2019

Anti-Immigration rhetoric unites EP's future new far-right group

Viktor Orban’s decision to withdraw his backing for Manfred Weber’s bid to succeed Jean-Claude Juncker has substantially increased the odds that Matteo Salvini will succeed in forging his new European Alliance of People and Nations into a group uniting most MEPs from the EU’s far right. With virtually all parliamentary business in the EP requiring only a simple majority of votes, the EAPN will not be in a position to block parliamentary decision-making or new legislation – provided, that is, a sufficient number of MEPs from the EPP, the S&D, the centrist and liberals, and the Greens can coalesce around a joint position.

But a large national-populist group overcoming the far rights' historic tendency to fragmentation could nevertheless emerge as a significant factor in the new European Parliament, particularly if it finds and elects a rhetorically gifted MEP carrying sufficient internal authority for its leader. The example of Guy Verhofstadt as the leader of Alde is a case in point: his oratorical talent and internal weight has arguably boosted the political impact of a relatively small liberal group associating national member parties with highly diverse political profiles on many issues.

Who could become the leader of the EAPN parliamentary group in the next EP is completely open at this stage, as are the results of many of the constituent national parties and the final make up of the new alliance. What looks like a near-certainty is the main unifying theme for the new group. On concrete issues like continued EU and eurozone membership, redistributive economic policies within the EU, border protection and the question of the internal resettlement of asylum seekers and other refugees, opinions will differ widely. The same goes for trade and core foreign policy issues. The one uniting factor for Europe’s far right is hostility to immigration from muslim-majority countries combined with a strong anti-islam rhetoric. A key question in the new European Parliament will be whether this pushes the EPP and possibly other parties in toughening their own stance, as has happened in the national politics of many members states.

We note in passing that key far-right parties, such as Marine Le Pen's Rassemblement National, have openly or implicitly given up on their earlier strategy to boost their voter intake by promising to take their country out of the eurozone. While most far-right parties are united in the rejection of the eurozone's current economic policies, calling either for more liberal or for more statist policies, many have found that reverting to the national currency is too scary a prospect for much of their own electorate. The policy is now to change eurozone policies and the EU's current rules-framework from the inside.  

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May 08, 2019

Not looking like a European century

The main historical lesson we have drawn from the eurozone crisis is that dysfunctional efforts of European integration do not self-repair, even if given time. We have concluded therefore that it is political and morally wrong to support half-baked projects in the hope that future generations will fix them, and that the priority now should be on fixing existing projects. We thus remain deeply sceptical of the EU's foreign and security policy. It had its limited successes, the now-defunct Iran nuclear agreement among them. But it lacks consistency, unity, as well as professionalism. This was seen at the West Balkan summit last week.

Politico offers a few detailed insights of last week's Berlin summit and especially of clashes between Emmanuel Macron and Ramush Haradinaj, the Kosovan prime minister. Macron apparently told him in a raised voice that he was in no position to ask for anything, at which point the diplomatic effort had already disintegrated. The summit broke down in mutual recrimination. This leads the paper to conclude that Angela Merkel and Macron unwittingly put Europe’s dysfunctional diplomacy on public display, highlighting disagreement at all possible levels: between Serbia and Kosovo, but also between France and Germany, and between both large countries and Federica Mogherini the EU's high representative.

In a related context, we noticed an essay by Dmitri Trenin, from Carnegie Moscow. He looks at the new post-war global order as a power play between the US, China and Russia, but with no independent role for the EU. Trenin naturally takes a Russian perspective, and sees China as Russia's main partner on the Eurasian continent with both of them defining themselves in terms of their antagonism towards the US. He says the new evolving relationship is going to be different from the period of the cold war or of the European nation states of the 18th and 19th centuries. 

We suppose that Trenin subsumes the EU as an integral part of the US. He makes a brief reference to the US extracting greater contributions from its allies in the future. Trenin does not follow through with the implications of that shift, and the impact of the EU's own positioning vis-a-vis or within Trenin's power triangle. In regards to Russia, he says the strategic goal was no longer to seek continental predominance, but to maintain its current position both in relationship to China and the US. He concludes that, for the foreseeable future, Russia regards the US as its principal adversary and China as its main partner. What has clearly ended is Russia's attempted integration with the West.

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