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Italy To Europe: Yes to Tax Cuts and Spending, No to Austerity


In his first speech to parliament, center-left Italian PM Enrico Letta has charted the course his new, unwieldy coalition government will take. The way forward: new tax cuts along with increases in government spending. As for Europe? The FT reports:

While Mr Letta promised that Italy would abide by fiscal commitments made to Europe he did not explain where the government would find the lost revenues of up to €6bn. Scant reference was made to cuts in public spending, beyond an end to funding of political parties and salaries for ministers. Mr Letta made no mention either of privatisation of state-controlled companies or sales of state assets.

We’ve long thought that Italy would play an aggressive hand in the euro wars. Italy’s economy has been crippled by European policies, but unlike Greece it could take Europe (including Germany) down with it if it chose to do so. Using weakness effectively is an important skill in international politics; by threatening to collapse, a country can force its stronger allies to make all kinds of concessions.

Former PM Mario Monti didn’t play the game aggressively enough for many Italians’ tastes. He threatened too little and gave far too much. Neither the Left nor the Right in Italy want a government that complies with more than the bare minimum of what Brussels and the Germans want. Working inside the European process to soften up the restrictions on spending (while keeping the requirement that the ECB back debtor country bonds), and exploiting any loopholes in European law and treaties to evade unpleasant politics: these are the only approaches that a solid majority of Italians seems ready to back.

[Italian PM Enrico Letta, photo courtesy Getty Images]

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  • Andrew Allison

    The Guardian nailed it ( This is an utterly cynical coalition united only in its efforts to retain power. In demonstrating that Grillo is right, they’ve almost guaranteed the rise of 5-Star to power.

  • Marty Keller

    Cut taxes/more government spending: Beppo Grillo notwithstanding, what could go wrong?

  • Kavanna

    Nothing can come of this absurd coalition. The enforcers of austerity are Germany and the other northern surplus countries. They’re unwilling to underwrite any more large amounts of public or bank debt in the deficit countries. They’ve done it so far only for small countries (Ireland, Portugal, Greece, and Cyprus). There’s nowhere near enough to cover the large deficit countries (Spain, Italy, and France). Even the surplus countries have to worry about bailing out their large banks, which are insolvent — oh, sorry, sshhh 🙂

    Italy has one advantage, a fairly high domestic saving rate. That’s what supports their public debt. But there’s not much left of that cushion, maybe another year or two. Remember that Hollande in France came in promising to reverse “austerity” (not that there was any in France) and quickly found himself reduced to doing the opposite. And France has a wealthier economy than Italy.

    One should note that, so far, we’ve had “fauxsterity” in most European countries, including Italy. Their spending and debt levels continue to rise, in all but a few cases (Greece, Hungary, Ireland).

  • Jim Luebke

    So instead of imitating successful countries’ policies, weaker and less productive EU countries are going to enshrine their lack of productivity in law.

    That’s going to make the EU the strongest political entity in the world! Hooray!

    Apparently, it takes less than 25 years to forget the lessons of history.

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