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Opinion
The Five Star-League proposals would blow the eurozone apart
Assumptions that the parties’ bark would be worse than their bite are misplaced


May 16, 2018 11:47 am by Tony Barber
Three conclusions can be drawn from the leaked document that summarises important economic policy proposals under discussion between the anti-establishment Five Star Movement and far-right League, the parties that are negotiating to form Italy’s next government.

First, the proposals are significantly more radical than financial markets expected after the two parties defeated mainstream pro-EU parties in Italy’s March 4 parliamentary elections. The markets’ assumption that the parties’ bark would be worse than their bite is being exposed as complacent.

Second, the proposals, if ever implemented, would break EU law and blow apart the 19-nation eurozone. Should they form a government, Five Star and the League would surely come under intense pressure to drop their most extreme plans, as happened to Greece’s leftist Syriza-led coalition in 2015. However, another scenario is imaginable: namely, that Sergio Mattarella, Italy’s president, will invoke rarely used constitutional powers to block a Five Star-League government from taking office in the first place.


In that event, Italy might hold snap elections, probably in October. There is, naturally, no guarantee that a new vote would not produce a second victory for Five Star and the League — in which case, the atmosphere of crisis surrounding Italy’s eurozone membership would persist.

The third conclusion from the leaked document, which surfaced in Rome on Tuesday, is that the ambitious plans for deeper eurozone integration associated with President Emmanuel Macron of France are all but dead in the water.

To take one example, the European Commission is drawing up a legal text for creating “sovereign bond-backed securities” — a euro-denominated asset that would bundle up the debt of different eurozone countries in a supposedly low-risk investment.

In the light of the latest political developments in Rome, it is inconceivable that Germany’s Christian Democrat-Social Democrat “grand coalition” would have any appetite for creating a pan-eurozone bond that connected Italian debt with German debt.

Five Star and League officials denied on Wednesday that the leaked document’s proposals represent a definitive statement of their plans for government. Yet even the denials leave plenty of room for concern.

For instance, Claudio Borghi, the League’s economic affairs spokesman, says the parties want to exclude Italian debt bought by the European Central Bank under its quantitative easing programme from calculations of Italy’s public debt to gross domestic product ratio.

That ratio stands at a colossal 130 per cent. But any attempt to reduce it by such artful methods would contravene EU law. It would also intensify the suspicions of Germany and its allies that more and more Italian politicians want Europe’s monetary union to operate in a fundamentally different spirit to that defended in Berlin.

Even if Five Star and the League were to abandon their debt proposals, some of their other ideas will go down badly in EU capitals. The list includes revision of a 2011 pension reform, a guaranteed monthly income for less well-off Italians, an amnesty for tax offenders, and payments to workers close to retirement age so that they leave the labour market immediately.

All this would cost tens of billions of euros at a time when the eurozone economy is slowing and the Italian economy, as always, is lagging behind those of its neighbours. Small wonder that Italy’s 10-year government bond yield rose on Wednesday to its highest level for two months.

tony.barber@ft.com