Genoa tragedy sets Italy on course for EU clash

EU & Italian Flags

The tragic loss of lives in Genoa when a large section of an elevated motorway collapsed is one of those dreadful events that should not have happened. We all feel for the families scarred by loss. It is a big event which is having a dramatic effect on Italian politics and government. This matters at a time when Italy is at the centre of worries and arguments over the future financial disciplines of the Euro.

The ruling coalition in Italy offers two differing but not necessarily contradictory explanations of the disaster. The leader of Five Star blames the private sector contractor responsible for motorway management. In his view, the company has failed to spend enough of the toll revenues it collects on maintenance. It leads him to an anti-big business and anti-rich family rhetoric, as the company concerned is owned by a powerful business family.

The leader of the Lega party, meanwhile, blames EU austerity policies. The strict controls on the amount Italy can spend and borrow, he argues, have limited the state’s capability to replace and improve major infrastructure. There are too many old roads and bridges that need major works as a state expense. Mr Salvini said, “There can be no trade-off between fiscal rules and the safety of Italians”.

The EU has been stung by this criticism into making its own statement. They claim Italy has spent too much on other priorities. They say they urged the Italian state to spend more on infrastructure investment. The danger for the EU in this reply is it gives credence to the Lega view that insufficient public capital spending is a big issue. The EU points out that in April 2018 it gave permission under EU state aid rules for an 8.5bn Euro investment plan for Italian motorways, including in the Genoa region, reminding Italian voters that even where an investment has a private sector component the EU can have a veto over it.

This has made the background to the budget talks for Italy that much more difficult and intense. Both Lega and Five Star are desperate to spend more. Lega remains committed to big tax cuts. Five Star is pledged to introduce a basic income for all paid by the state. Now both parties will need to support an increased programme of public works to deal with old and inadequate infrastructure.

None of this comes cheaply, and it is not compatible with EU budget discipline. The EU sees a country with state debt at 130% of GDP, more than twice the permitted level for the Euro scheme. Germany sees a country with a reputation for borrowing too much wanting to borrow more by taking advantage of low short term interest rates the Eurozone has achieved, in part thanks to German fiscal discipline. The Italian leaders of two relatively new radical parties know the Italian electorate has had enough of austerity and wants to see lower unemployment, better public services, and now substantial public investment.

Italy has many older bridges, viaducts and major structures. All of these will now presumably be subject to expensive review, with prudent recommendations likely concerning the need for replacement or strengthening. More of this work is likely to be in the public sector, given the backlash against the private contractor in Genoa. A compromise is possible. The EU could insist on Italy remaining below the 3% ceiling on deficits but allow its deficit to go up to that level instead of requiring more cuts. The EU could also be generous in its interpretation of state aid rules to allow more private capital to be used as well, though a further Five Star campaign against private involvement in these matters makes that more difficult. Lega and Five Star could give the public a taste of what they have promised without breaking the bank.

The tragedy at Genoa has made drafting a budget acceptable to the EU that much more difficult. It has also created an emotional intensity to the debate that all involved need to recognise when they contemplate how to compromise. If the EU does dig in, it can deny the Italian state and Italian banks the liquidity and borrowing permissions they need. This would drive markets sharply lower and do considerable economic and financial damage that would spread well beyond Italy. We still work on the assumption that Italy is too big for the EU to adopt the heavy handed tactics it used with Greece and Cyprus to enforce budget discipline.

 


The above article was previously published by Charles Stanley on 17th August 2018