The economic program of the new government should cost the huge amount of EUR 100 billion. With a gross public debt of more than EUR 2,300 billion at the end of March 2018 (i.e., 132 % of Italian GDP), this economic program would certainly make the trajectory of the Italian debt unsustainable. Moreover, the Italian government would of course avoid European budgetary rules by implementing its program. The question that arises is: What are the counter-powers in place? The first one is the Italian President Sergio Mattarella. He is the most legitimate counter-power from the Italian point of view as his power to cause harm is more important than one might think. First, he could refuse that Giuseppe Conte becomes President of the Council. The second one is the European Central Bank (ECB) because the Frankfurt-based institution owns 17% of the Italian gross public debt. Moreover, Italy is too dependent on the European Union’s financial aid to simply ignore Brussels. Last, but not least, financial markets could put pressure on the new Italian government because foreign creditors own 33% of the Peninsula’s gross public debt. Indeed, since the beginning of May, the Italian 10-year bond yield skyrocketed by more than 60 bps, of which 22 bps since the end of the last week.
Who owns the Italian gross public debt?
If counter-powers are likely to put enough pressure on the new populist Italian government, the country will not carry out the structural reforms it needs to regain some fiscal space. However, an “Itexit” remains very unlikely in the near term. At the end of the day, it appears that there is now a kind of irreversible rise of opponents to “this” Europe, i.e., the European Union. The European Union could be dying, at least in its present form, and politicians must consider this agony. In wanting to federate Europe too much, we sometimes forget that it is composed of sovereign states. Financial markets will not forget to remind Brussels and the Italian government of this.
Julien Moussavi, Head of Economic Research – Sources: Beyond Ratings, EC, Eurostat