Italian Prime Minister Giorgia Meloni Shakes Things Up at Home
After successfully navigating the political landscape in Brussels and gaining the support of her more moderate counterparts, Italian Prime Minister Giorgia Meloni is now making waves within her own country.
On August 8, Italy’s announcement of a 40% windfall tax on banks caused Europe’s main banking index to drop by 2.7%. This unexpected move caught traders off guard, but was later toned down within 24 hours.
The government’s plan to regulate flight prices to certain destinations has been met with resistance from airlines. The Italian government will meet with airline executives next month, and the European Commission is currently assessing whether this measure complies with EU law.
Meloni, who was elected in October, is not only Italy’s first female prime minister but also the first from a far-right party since World War II. Despite concerns that she may push her country to the fringes, she has largely aligned with mainstream political positions both domestically and internationally. She has maintained a cooperative relationship with officials at the European Union and has shown support for Ukraine in the aftermath of Russia’s invasion, despite some members of her cabinet having ties to the Kremlin.
While some analysts view her backtrack on the windfall tax as a misstep, they expect Meloni to remain consistent in the fundamental aspects of government policy. Federico Santi, a senior analyst at consultancy Eurasia Group, remarked that the government’s economic policy-making has been erratic but believes Meloni will stay on course.
Steady Fiscal Policy and Economic Outlook
Contrary to the perception of a more populist government, experts argue that Meloni and her finance minister, Giancarlo Giorgetti, have made efforts to manage fiscal policy responsibly and avoid significant deficits. They have aimed for a gradual fiscal adjustment, in line with EU recommendations, to maintain a declining path of deficit and debt without fueling inflation.
As of 2022, Italy’s government debt-to-GDP ratio stood at 144.4%, but it is projected to decrease to 140.5% in 2023 and further to 138.8% in 2024. The Italian economy is expected to grow by 1.1% in 2023 and 0.9% in 2024, a decline from the 3.7% GDP growth in 2022, according to the International Monetary Fund.
Key Events to Monitor
Although it is unlikely that the Italian government will pursue controversial measures, analysts highlight two events that international investors should pay attention to.
Firstly, the upcoming budget is expected to generate turmoil and volatility, potentially straining relations between Brussels and Rome. Governments across the EU must submit their budgetary plans in October for assessment by the European Commission to ensure compliance with EU rules.
Secondly, delays in receiving EU funds pose a significant risk. Italy is the largest beneficiary of the 750 billion euro ($814 billion) program aimed at revitalizing the European economy after the Covid-19 pandemic. However, disbursements are contingent upon nations implementing specific measures and reforms. The timely receipt of these funds is crucial for Italy’s economic growth and public investment. Delays may hinder the government’s ability to meet its investment targets.
