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Italy’s Renzi Unearth’s Billions Italy Hasn’t Got

Late in 2013, Italy was in an enormous panic over finding €4 billion to make up the shortfall of abolishing something called the IMU, a property tax. It seemed Italy was very short of cash. Not any more!

New Italian prime minister Matteo Renzi appears to have found more than €70 billion and he’s found this pot of cash in record time too. Except, as you will discover, Mr Renzi as unearthed money which doesn’t exist.

Prior to Mr Renzi, Mr Berlusconi had promised Italy tax cuts, but didn’t deliver. Mr Monti hinted at tax cuts, but taxes went up. Mr Letta, Monti’s successor also promised cuts in taxes but was not in power long enough to implement them. Then along comes Renzi and literally overnight he’s promising, and appears to be the way to delivering, tax cuts and at the same time, he’s going to up spending too.

As an aside, Italy’s level of public debt is at record levels. Indeed, the level is so high, the EU, the IMF, the ECB and a few others are watching Italy very attentively.

Eyebrows at the EU and the ECB have been raised by Renzi’s generous multi-billion Euro promises.

Renzi Spending

Mr Renzi is promising €3.5 billion for school maintenance works. Italy’s schools, like Italian national monument Pompeii, are crumbling and there are fears a good few schools may collapse on the heads of their pupils. Actually, this has already happened. In a school near Verona, two children were injured where a ceiling collapsed last February. Mr Renzi is visiting a school in Rome today – the third school in Italy he’s graced with his presence since he ended up as Italy’s third unelected prime minister.

On top of the school repair works cash, Renzi is also promising a €10 billion tax cut give-away. Italy’s premier is not stopping there either. He’s also promised to settle a large chunk of the Italian state’s debts with its suppliers. This will cost somewhere in the region of €60 billion.

The total cost to Italy of Mr Renzi’s promises so far, is 3.5 plus 10 plus 60 which gives €73.5 billion. Not bad seeing at all seeing as finding a mere €4 billion seemed all but impossible a few months before.

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Everyone, which includes this Italy watcher, are wondering just where Mr Renzi is finding all this cash, which Italy’s prime minister states does exist. Why all this cash wasn’t found before will probably remain a mystery. Well, it’s impossible to find something which doesn’t exist, isn’t it? Time to ask a wizard or an expert. I chose an expert.

Ask an Economist Time!

So just where is Mr Renzi finding the billions to fund his radical reforms for Italy? Has Italy struck gold? Did Mr Renzi get to the end of the rainbow?

Via Twitter, I asked economist, Ireland based academic and journalist Constantin Gurdgiev about this.

Gurdgiev replied that he suspected Italy is going to extend its deficit to help fund Renzi’s cash handout plans. It sounds as if Gurdgiev hit the nail squarely on the head. Well, cash strapped Italy has no other options and the EU had, tentatively, agreed to allow Italy to go down this risky road.

In fact, Mr Renzi is in negotiations with the EU. From what is being reported, it sounds as if Mr Renzi is seeking concrete permission for Italy to let its national debit increase, possibly over the 3% of GDP limit set by the EU. The EU has stated it might be prepared to allow Italy to increase its defect, but before this can happen, it will require detailed information on how Renzi proposes to fund all his give-aways. Mr Renzi may also promise the EU that Italy will finally get serious about collecting taxes as this would also help the nation find the cash it needs to fund reforms and tax cuts.

If the EU says no to extending Italy’s deficit, Italy’s economy could topple over into an abyss and take the rest of Europe with it too. The EU will be aware of this possibility.

The Future of Italy Lies in EU Hands

Italy’s future and the well-being of its economy appears to depend on how benevolent the EU feels towards one of Europe’s most unruly nations. Even if Europe does give Mr Renzi permission to do what he wants to do, Europe will set conditions. One of these conditions may well be that if Italy doesn’t start showing certain signs of improvement within a certain period, the EU will march in and its mandarins will take over the running of the country.

Mr Renzi will be aware of the possibility of the EU taking control of Italy but it’s not worrying him. He says he’s prepared to shoulder all the blame if his plans go horribly wrong.

Italy’s politicians are famous for their grand promises and are infamous for finding excuses when they, invariably, fail to deliver or renege on them. Will Matteo Renzi prove to be any different?

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