If Giorgia Meloni’s government were a movie, it would have been a public and critical success: it is the findings of polling institutions, the ratings expressed by analysts and rating agencies, and the reactions of the financial markets that suggest this, just over 100 days into her term. According to Morning Consult, an international research institute, Giorgia Meloni is, as of January 25, the fifth most popular government leader in the world in the opinion of the domestic population, preceded in Europe only by Switzerland’s Alain Berset. With an approval rating of 53 percent, Meloni managed to improve on the figure that Morning Consult itself had found immediately after her election victory of 49 percent (although, in parallel, the number of uncertain voters, who swelled the ranks of the disgruntled, fell from 33 percent to 39 percent).
The hold in the popularity of the Meloni government could not be taken for granted, considering that the only opposition party to the previous Mario Draghi-led executive passed a Budget Law in a sign of its continuity.
“One of the government’s first measures was the approval of the 2023 budget, which envisages a fiscal deficit of 4.5 percent of GDP [down from 5.6 percent, Ed.], remaining broadly in line with the previous government’s prudent fiscal stance,” rating agency S&P said in a January 30 note, “despite some controversial policies.” Contrary to what one would expect from an executive led by a party branded as ‘populist’ for a long time, S&P anticipates “a tightening of fiscal policy,” i.e., cuts in public spending “because the government has minimal fiscal space, given the high debt (147 percent of GDP in 2023) and the announced reactivation of the fiscal constraints imposed on all EU member states by the Stability and Growth Pact in 2024.” Apart from S&P, financial analysts’ consensus only expects the Meloni government to venture into generous spending policies or tax cuts with hedges.
The market’s thermometer speaks volumes
This is also why the government’s first 100 days have not caused a widening of the Btp-bund spread, representing how much Italy is considered a risky borrower compared to the most reliable one (Germany). Compared to the last pre-election value, that of September 23, the spread has narrowed, as of February 1, by -14.44 percent, falling from 219.7 to 188 basis points. With a marked lowering observed, moreover, in the days following the approval of the Budget Law.
After all, the Meloni government’s Maneuver focused two-thirds of its resources on moderating the cost of bills to households and businesses. Financial observers gave the other measures little weight: “The rest,” ING senior economist Paolo Pizzoli had commented on January 19, “is dispersed in numerous measures, ranging from refinancing the tax wedge cut (again, in continuity with the Draghi government) to the extension of a flat-tax-like system for the self-employed.” Despite the evocative names (incremental flat tax), even a moderate cut in the tax wedge is a measure whose cost is relatively small. Even the early retirement windows granted to some workers, which have always been criticized by supranational institutions such as the OECD, have become less affordable and generous than similar measures approved in the past.
Political endorsements
Such a cautious and conservative posture has not been slow to earn praise even from the political establishment. Visiting Rome on January 30, the president of the European Council, Charles Michel, publicly praised the Italian premier’s “responsibility” in her first 100 days of government: “I wanted to wish the President of the Council good luck,” Michel said, “and to thank her for the very frank, direct and sincere collaboration that we have had in these months at the European level, based on Italian interests but also with the will to protect the European Union.” These words give little away from the most contentious elements brought to the table by the Italian government: migration policies and the willingness to renegotiate the terms of the NRP for Italy.
Even The Economist, one of the favorite readings of the global political-financial elite, had to give Giorgia Meloni credit for not scaring off the markets or the European establishment, despite the publication’s historical aversion to populist-minded leaders; moreover, without losing share of consensus in the country. If this happened, however, it is also because the hard part of the job would have yet to come. “It is what has not happened since the right took power that is most telling,” wrote the British newspaper, “the markets hardly flinched at the advent of a government led by a party that draws its origins from neo-fascism and was once unabashedly eurosceptic.”
When the issue of constitutional reform, in a semi-presidential sense, comes to the table, political divisions within the League could explode, the Economist wrote. Verification of the Recovery’s funding release targets remains a long way off, despite the government’s claim that it has met all 55 of them. Most importantly, many analysts fear that the ECB’s monetary tightening and quantitative tightening, which will reduce the BTPs in the central bank’s portfolio, will end up pushing up yields on Italian government bonds (which have held so far) by a large margin. Monetary normalization, deemed necessary to curb European inflation, has been repeatedly criticized by the Meloni government. The high public debt exposes the Italian government to refinancing costs much more sensitive to the interest trends demanded by investors. This means that if BTP rates go up, there will be less money for the government to implement the political program and maintain consensus.
According to a note from Goldman Sachs analysts dated January 10, “Italian debt sustainability will remain top of mind” due to “high issuance in the first quarter, the start of Quantitative tightening in March, and potential frictions around the implementation of Next Generation Eu in the first half of 2023.” According to the investment bank, the spread is expected to rise back to the 260 basis point area because of all these challenges.
Should speculation on BTPs start, will the ECB intervene with its anti-spread shield, the Tpi? That is the question investors, but probably government technicians, have been pondering for several weeks.
If it were a movie, the Meloni government is just at the beginning: it started quietly but promises a plot twist.
