The Italian government has produced a budget for the upcoming fiscal year which allows their politicians to fulfill their main promises: it provides tax cuts for the citizenry; it provides a universal basic income; and it rolls back extensions to the retirement age. It does this while keeping most of its existing government services intact.
All of this is achieved because of the stimulative effect of tax cuts, and simultaneously the stimulative effect of the government dispersing money for people to purchase with.
The EU has rejected the fiscal plan. This is the first time that the EU has rejected a proposed budget from a member nation, and their reasoning was basic. Italy, a country already dealing with a massive debt load that threatens their financial institutions, is calling to drastically increase that debt – the 2019 budget would place the debt at 130% of GDP – and was using unfeasible growth projections.
The Vice-President who announced the budget rejection explained:
“Breaking rules can appear tempting at a first look, it can provide an illusion of breaking free. It is tempting to cure debt with more debt, but at some point the debt weighs too heavy.”
European Commission Vice-President for the Euro and Social Dialogue Valdis Dombrovskis
Italy’s ruling government is a populist-nationalist coalition that has promised to spend its way to prosperity. They are framing the rejection as a political issue rather than an economic one, and vowing to remain steadfast against the EU. From the UK Telegraph:
“This doesn’t change anything, let the speculators be reassured, we’re not going back.”
“They’re not attacking a government but a people. These are things that will anger Italians even more and then people complain that the popularity of the European Union is at its lowest.”
Deputy Prime Minister Matteo Salvini
Italian government officials have condemned the European Union’s demands to follow the rules of basic economics as fake news, going so far as to denounce the “mountain of lies” by taking the EU commissioner’s notes and putting his shoe on them, figuratively stomping them.
The contrast of expectations has sent Italy’s stock market tumbling.
There are concerns in the economic fields about contagion if Italy’s economy fails. Contagion is the term for economic failures triggering failures in other nations because those nations are invested in the first, with cascading failures following.
