And “Toxic mix of high inflation and sluggish growth”, destined to slide several euro area economies into a condition of full blown recession: this is the alert launched by Alfred Kammer, director of the European Department at the International Monetary Fundin reflection: “Europe Must Address a Toxic Mix of High Inflation and Flagging Growth”.
In an interview with the newspaper “The Republic”, Kammer then also turned to the new Italy of the Meloni government, rattling off advice: first of all, trying to avoid the clamorous mistake that cost the seat of Liz Truss, now former British premier of the shortest government in the history of the United Kingdom.
Runaway inflation in Italy and other Eurozone countries it does not allow fiscal drift. Indeed, the diktat according to the International Monetary Fund official should be the following: “Responsible fiscal policies to cope with the energy crisis”.
In his analysis aimed at the entire block of the euro area, Kammer writes: “According to the projections of our latest outlook on the world economy (IMF outlook WEO update), next year the advanced economies of Europe will grow by just 0.6%, while the emerging economies (excluding Turkey and the countries involved in the war Belarus, Russia and Ukraine) will report an expansion of 1.7% ”.
It is “lower growth rates respectively by 0.7 percentage points and 1.1 percentage points, compared to the July projections “.
“This winter – continues the official of the IMF – more than half of the euro area countries will face a technical recession, characterized by at least two consecutive quarters of GDP contraction: among these countries, production will fall, on average, by 1.5% compared to the peak. Croatia, Poland and Romania will also experience recession, with one average drop in production from peak to bottom of more than 3% “.
Italy, for whose economy the IMF estimates a contraction of 0.2% for 2023, it is among the countries that will join the club of those in recession.
Consequentially, “Next year, production and incomes will be lower than nearly half a trillion dollars than what the Monetary Fund had predicted before the outbreak of the war. A bleak image of the serious economic losses suffered by the continent since the beginning of the conflict. And, if it is true that a slowdown is expected, in the course of 2023, inflation will remain significantly above central bank targets, equal to 6% and 12%, respectively, in advanced and emerging economies “.
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Rebus Meloni government: will or not follow the right path of Draghi?
And this the context in which Giorgia Meloni is preparing to govern. Priority: to steer Italy out of the crisis, one of the worst in recent decades.
Europe and the world are looking carefully at the government of the leader of the Brothers of Italy, to understand to what extent Meloni & Co. will remain loyal to their following of populist and sovereign voters.
Some analysts interviewed by the Financial Times underline that the prime minister is already trying to dampen the fears of Brussels about the risk that Italy will abandon the straight path marked by her predecessor, the former president of the ECB Mario Draghi.
The danger lies rather in the pressures that Giorgia Meloni will have to face. In particular, those “Populist and nationalist tendencies coming from his own party and his … allies” towards which, according to Nicoletta Pirozzi, director of the EU program at the International Affairs Institute of Rome, Melons could go back to being drawn.
However, Pirozzi told the FT, “(Meloni) is more likely to avoid entering a collision course with the European Union, as it did the Hungarian Prime Minister Viktor Orban“.
Already during the election campaign, the premier stressed the intention to make public finances stable.
The litmus test will come with the budget law that his government will present in Brussels, and which will be drafted by the new Minister of Economy and Finance Giancarlo Giorgetti who, a member of the League, is in favor of the flat tax so much heralded by the leader of the Northern League, Matteo Salvini.
Meloni Government, Scope: waiting for the imminent budget law
Alvise Lennkh-Yunus, Executive Director Sovereign team di Scope Ratings, highlights the rapidity with which the new Meloni government was born, the fragilities that emerged even before its constitution and the challenges it is called upon to face, that is to find a balance between the need to provide additional fiscal support to tackle the energy crisis and the increase in the cost of living and the need to gradually consolidate Italian public finances.
“The Italian government quickly took shape after the September 25 elections, thanks to the strong majority of the center-right coalition and the urgency, emphasized by President Mattarella, to address the current energy crisis and geopolitical tensions – recalled Lennkh-Yunus – However, despite the majority in Parliament, the coalition faced tensions regarding the appointment of key ministers, and the decision of coalition partner Forza Italia not to participate the election of the President of the Senatefactors that have highlighted the fragility of this government ”.
This means that “It is probable that the stability of the coalition will be tested often in the coming years, as, in particular, Prime Minister Meloni is counting on the support of both allies (Forza Italia and Lega) to continue to secure the parliamentary majority “.
Right, “the completion of the budget law for 2023 will be among the first carefully observed decisions of his government, as it is aimed at addressing the problem of energy and the cost of living and, at the same time, the need to consolidate public finances, despite the deterioration of the economic outlook and increased interest rates on high debt, which is 150% of GDP. The credibility of the government, and in particular the communication it will have with the European institutions and with the markets, will be critical factors in maintaining investor confidence ”.
Not for nothing Alfred Kammer of the IMF, in his interview with La Repubblica, he gives some advice to the Meloni government, recognizing first and foremost that the new executive will have to “Face very complex political choices”.
Of one thing Kammer is convinced:
“It is of fundamental importance to formulate the right fiscal policy, there is no doubt about this. In our view, this starts with policies to address the needs of the population in terms of cost of living. Across Europe, and also in Italy, this means that these policies should be temporary and continue to be targeted. This is important to generate room for maneuver for the budget and allow for further consolidation, it is also important for responding to the direct needs of vulnerable families. As for the overall fiscal policy package in Italy, we have to wait for the announcements of the new government ”.
Said this, that Italy does not take the example of what has happened in recent weeks in the United Kingdom: a historical chaos, which culminated in the collapse of the Liz Truss government.
“This case illustrates the difficulty in defining policies and ensuring that they are clearly aligned with the goals we are trying to achieve. This is true across Europe and, as we have discussed, we need a monetary policy focused on reducing inflation. This means tightening monetary policy, and having a fiscal policy aligned with this objective “, the International Monetary Fund official warned again.
Therefore, no headaches and announcements of fiscal measures that are neither in heaven nor on earth, if only because they are not sustainable, requiring the creation of additional deficits and additional debt.
Giorgia Meloni has been notified. Now it is up to her for what she will be remembered having done (or not done) for Italy.
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