League/Five Star want return to ‘pre-Maastricht’ era

Italy’s two leading populist parties, which are locked in talks to form a coalition government, want to return to a “pre-Maastricht setting” in European economic policy — before the introduction of the single currency and common fiscal rules, they said in a statement early on Wednesday.

The anti-establishment Five Star Movement and the far-right League, which prevailed in the March general election, have vowed to break with eurozone economic orthodoxy but are immersed in heated discussions on the extent of the rupture. 

Late on Tuesday, Huffington Post Italy published a draft version of their planned coalition agreement in which the two parties sought “specific technical procedures” to allow countries to leave the euro and recover their “monetary sovereignty”.

Five Star and the League responded by saying that text, dated Monday morning, was old and had since been updated to remove any provisions that would question Italy’s membership of the euro.

But on Wednesday, the parties released a new statement laying out their common position on the eurozone, revealing a desire to return to the days of the lira in the 1980s and early 1990s.

“The structure of European economic governance, based on the dominance of the market, and the respect for rules that are stringent and unfounded from a social and economic point of view, requires a rethink with our European partners,” they said. 

“The spirit must be to return to the pre-Maastricht setting in which European states were moved by genuine intents of peace, brotherhood, co-operation and solidarity,” they added. 

The Maastricht treaty, which was signed in 1992 and entered into force in 1993, laid down the framework for the launch of the euro, and began setting economic policy standards — including fiscal rules — to foster convergence among the members of the future single currency.

In reaction to statement by the Five Star and the League, investors sold Italian assets, sending yields on benchmark government bonds sharply higher while Milan-listed shares slipped against a trend of gains on European stock markets.

The yield on 10-year government debt rose 6 basis points to 2 per cent. The FTSE Mib, the Italian stock market benchmark, fell 0.4 per cent. The gap between Italian and German 10-year bond yields rose to 137.35 basis points from 129bps late on Tuesday.

In their statement on Wednesday, Five Star and the League did not address other features of the leaked text that could also set alarm bells ringing among economic policymakers and investors.

Among them is a request for the ECB to cancel the €250bn in Italian debt it is due to hold by the end of its bond-buying programme — known as quantitative easing  — a proposal that could run foul of an EU treaty that bans the monetary financing of countries. The ECB has declined to comment.

On their tentative coalition agenda, Five Star and the League said this policy would result in a 10 percentage point reduction in Italy’s debt-to-GDP ratio, which currently stands above 130 per cent, one of the highest in the eurozone. 

The leaked document was published at the end of the latest day of high political drama in Rome, when the country’s relationship with Europe came into focus  as one of the main sticking points in talks between Luigi Di Maio, the Five Star leader, and Matteo Salvini, the League leader.

Although the talks suffered a significant setback on Monday after the two sides failed to reach a deal on naming a prime minister to head their alliance, Mr Di Maio and Mr Salvini were more optimistic after Tuesday’s meetings. There are expectations they might be in a position to reach a final deal by the end of the week, if not earlier. 

Some of the other proposals contained in Monday’s draft included:

  • A review of Italy’s contribution to the EU budget
  • Separating “traditional lending activities from speculative financial activities” 
  • Protecting small businesses from the “liberalisation of working hours, the rapid expansion of large retailers, and the implementation of the EU’s Bolkestein directive [on liberalising the internal market]”

In terms of domestic economic policy, the document confirmed the push for a guaranteed income for poor Italians, as well as cuts to income taxes, and plans to reverse a 2011 pension reform — all costly measures that could raise concerns about public finances. 

In foreign policy, Five Star and the League — which have been increasingly leaning towards the Kremlin — called for the “immediate withdrawal” of EU sanctions against Russia.

“We confirm our membership of the North Atlantic alliance, with the US as a privileged ally and an opening to Russia, which should not be viewed as a threat but an economic and commercial partner,” the text said. 

One of the most notable features of the draft was the establishment of a “reconciliation committee” composed of the two leaders — and the future prime minister — to handle disputes and discuss how the government should respond to situations unforeseen in the final compact.

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