Italian finance minister tries to calm down the markets: We need trust - WASHINGTON POST
WASHINGTON POST - 07/23/2018
Giovanni Tria, Italy’s embattled finance minister, has a tough job. In March, Italian voters brought to power a populist coalition formed by the left-leaning Five Star Movement and the right-wing League party, formerly the Northern League. The two main figures in the ruling coalition — Matteo Salvini, leader of the League party, and Luigi Di Maio, leader of the Five Star Movement — promised the moon and more. Di Maio has promised a guaranteed annual income for all Italians, while Salvini has promised tax cuts. Italian markets have been rattled in recent days amid reports that Tria might be forced to step down. He has said that Italy remains committed to the European Union and vowed to keep the deficit from exploding. Tria talked to The Post’s Lally Weymouth in Rome recently about the challenges ahead. Here are some excerpts from the interview:
Q: What is Italy’s commitment to staying in the European Union and the euro zone?
A: Italy is one of the founding countries of the European Union, so not only does Italy belong to the E.U., but it has been and still is central to it. As for the euro zone, there are no discussions now about leaving it.
Q: But some of Italy’s leaders don’t agree — they are known as euro skeptics.
A: The leaders of this government have always stated that they want to stay in the E.U. Nothing in the program of the government states the opposite. There are no discussions about whether Italy belongs in the E.U. or the euro zone.
Q: Italy’s two deputy prime ministers, Salvini and Di Maio, wanted initially to appoint Paolo Savona as finance minister. Savona had a “Plan B” that leaked in which he spoke about withdrawing Italy from the E.U. during a weekend, without even telling the E.U. The markets panicked, the stock market fell and Italy’s President Sergio Mattarella stepped in and vetoed Savona’s appointment.
A: Professor Savona shares my ideas that we belong in the euro zone. This widely quoted “Plan B” was part of an academic study that the professor wrote arguing that Italy — like any other European country — should be ready with a plan regarding what to do in case something happened to the euro.
Q: You argue that outsiders don’t understand the difference between discussions about the euro zone and a wish to exit.
A: People can be critical of the governance of the euro zone. We are discussing reforms. But this discussion is different than saying we don’t want to be in the euro zone or be part of Europe.
Q: The markets see you as a very reassuring figure and although many people respect you, they don’t understand how this government can increase spending, cut taxes and keep Italy’s deficit under control.
A: We have just started to pursue our goal, which is decreasing the debt-to-GDP ratio. The deficit will be in line with that.
Q: But how can you do that if you’re increasing spending and cutting taxes?
A: That is not a problem. The reforms for welfare spending will be made within the limits of the planned deficit. The government wants to introduce a basic income. We spend a lot of money on many welfare institutions that all have the same aim – to support the unemployed or those living in poverty. We have to take this money and use it for the basic income. We have to change the composition of the expenditure. You can’t have duplication of welfare institutions for the same aims.
Q: Do the politicians understand this?
A: Yes, of course, they are not stupid. Then we have to change the composition of taxes.
A: We have to introduce a flat tax.
Q: Will you bring in the same revenue with the flat tax?
A: It depends on the level of the tax. If you decrease some taxes, you must increase revenue from other taxes. We have to change the composition of our revenue and spending. This way, we can arrange our reform and at the same time respect the limit of the deficit.
Q: Your government is making promise after promise. Isn’t your economy unsustainable in light of the European Central Bank’s cutting back stimulus measures?
A: Our political leaders never said they want to introduce these reforms to increase the deficit.
Q: No, but they said they want to roll back the changes in the pension system and cut taxes by going to a flat tax and also increase spending. How will that not increase your deficit?
A: The government agrees that all reforms that we introduce will respect the limit of our deficit.
Q: Can you stick to the Maastricht spending limit of 3 percent? (One of the obligations of the Maastricht Treaty was for members to have annual deficits no greater than 3 percent of GDP.)
A: We have agreed to stay within the limit with the structural adjustments.
Q: As the ECB cuts back on quantitative easing, how will that affect your economy?
A: It will affect the European economy in general. We have a slow growth rate in Europe, and I think that we have to work on a policy to increase it.
Q: How do you do that?
A: By increasing public investment in infrastructure.
Q: Do you have the money?
A: We will increase the share of public investment in our expenditures.
Q: So you won’t have to break some of the promises of the coalition to keep the debt under control?
A: We agreed on this program. We need the trust of the international financial markets.
Q: But the international markets are concerned about the risk profile of Italy. How can you reduce this?
A: By keeping our commitments and decreasing the debt-to-GDP ratio and keeping the deficit low.
Q: But that isn’t easy without growth, is it?
A: It is important to keep the deficit low and to increase public investment. [This will result in] private investment and then we will increase the rate of growth.
Q: How can you attract foreign business?
A: Part of the government program is to simplify the system for implementing investment for foreign business. We have to simplify the tax system and reduce transaction costs for those who want to do business in Italy.
Q: But hasn’t Deputy Prime Minister Di Maio pushed through a bill limiting temporary job contracts? Now employers have to pay for full-time workers, making it difficult to lay off workers. How does that encourage investment to come here?
A: I think the Italian labor market is the most free market in Europe and maybe in the world. My message is that the United States has to put its trust in Italy. Our economic fundamentals are okay, though we have a low rate of growth. Our main aim is to increase this rate of growth.
Q: Do you think it is really possible?
A: Yes. Increasing public investment in infrastructure and attracting foreign direct investment is the road for growth.
Q: So you think private investment will come here?
A: Yes. The forecast for growth in Europe is not so good. The forecast sees a slowing of growth. There is some fear about tariffs and protectionism. Maybe this is just a perception. But as you know, perceptions are important. I think we should keep trade as free as possible. Tariffs will slow the rate of growth in general. Italy is an open economy, and it will have some impact here.