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The Financial Times reports Five Star and League Strike Italy Government Deal.

The FT notes that the "Platform tones down some Eurosceptic rhetoric but steps up curbs on migration."

Eurointelligence goes much further in its analysis stating the more radical Lega (League) gots more of its platform than Five Star.

Don’t Be Fooled

The Italian government deal is finally agreed, without some of the more controversial bits, but make no mistake: the anti-euro stance is still in there. The rhetoric is toned down, but there is little substantive change from the previous version.

We agree with Massimo Giannini who writes in La Repubblica this morning that, despite the removal of the explicit euro exit option, the actual exit threat remains implicit in the fiscal policies. He puts the costs of the agreed reforms at €100bn per year, about 6% of GDP. We have seen lower estimates, but the point is that there is no way to reconcile the policies, even in their toned-down versions, with Italy’s obligations under the EU’s fiscal rules.

Even though the Lega is the smaller party, its positions have by-and-large prevailed, while Five Star agreed to the curtailing of some of its more expensive ideas. The reason for this imbalance lies in the shifting political power. The latest polls put the Lega at 25%, while Five Star holds up above 30% but with a loss of 1pp. The PD is at 18%, and Forza Italia is down at 12%. Most importantly, the combined centre-right coalition which includes the Lega is now over the critical mark of 40%.

Mish Note: 25 + 12 = 37. To get to 40, Lega would still need support from Fdl and Ncl which polled 4.3% and 1.3% in the last election. So 40% is not a sure thing.

The euro exit clause is gone, too, as is the reference to monetary sovereignty. But they reintroduce a curious line about a "spirit of a return to the pre-Maastricht approach in which the EU States were moved by a genuine intent of peace, brotherhood, cooperation and solidarity." Pre-Maastricht is, of course, a euphemism for pre-euro, and pre-EU too.

The ludicrous idea of the ECB monetising Italian debt is gone, as is the idea of not counting the central-bank-held debt in the debt-to-GDP metric.

Corriere della Sera did the math on the entire programme, and came up with a figure of €65bn a year which is still almost 4% of GDP. The paper said this is a lower estimate, as it assumes some offsetting cost savings and a Laffer-curve effect for a tax cut on consumption raising tax revenues indirectly.

The two-step tax bands of 15% and 20%, the Lega’s most important demand, will cost €26bn a year gross. The citizenship income, if implemented in full, would cost €17bn, but the net costs are likely to be lower because the Lega prevailed with a stipulation linking the universal basic income to an obligation to except job offers.

What Changed?

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In one word: nothing.

President Sergio Mattarella would not have gone along with clauses explicitly calling for a Euro exit, but his only recourse would have been new elections.

If Lega thought it could do better with new elections then it would have gone that route, but with huge risks.

I strongly suspect Lega leader Matteo Salvini would rather take his chances with Five Star rather than Silvio Berlusconi, Salvini's alleged center-right, Forza Italia partner.

What Matteo Got

  • An anti-immigration platform that calls for the speedy deportation of an estimated 500,000 migrants on Italian soil.
  • Budget platform that is between 4 and 6 percent deficit to GDP
  • Repeal of pension reform
  • Language about a "spirit of a return to the pre-Maastricht approach" instead of a specific call to exit the euro.
  • Five Star got its key demand of universal income but with Lega's demand that people take a job if offered.

From Salvini's perspective, was this "compromise:" better than any possible deal with Silvio Berlusconi?

Undoubtedly, and it permanently puts Berlusconi out of the picture as long as Five Star stays in the coalition.

Is that likely? Yes!

Five Star got an anti-immigration platform, universal income, and huge budget increases.

Collision Course

Italy is on a collision course with the EU and ECB.

Mike "Mish" Shedlock