Meloni Channels Her Inner Truss With Market Gamble

Similarly, Meloni’s first international outings have extended a spirit of antagonism with traditional European Union partners (the countries that are keeping her government afloat). Meloni took time out from domestic affairs to speak via video link at a rally for the far-right Spanish party Vox, where she declared “Long live Europe of the Patriots!” Other speakers included Donald Trump and Viktor Orban.

Closer Franco-Italian relations fostered by Draghi and French President Emmanuel Macron also appear consigned to history. Meloni had a public spat with France’s Minister for European Affairs Laurence Boone — who warned that France would monitor respect for the rule of law under her government — requiring President Sergio Mattarella’s intervention to restore diplomatic calm. 

This may yet all prove to be red meat for Meloni’s base. I’ve spoken to several politicians on the left and right and those close to Draghi who argue that it is. Coached by Draghi, Meloni has pledged to be pro-Europe and pro-Ukraine, to uphold the values of her predecessor. There’s not a lot of margin for error — either by her new coalition or for investors — as the political and economic firestorms in Britain suggest.

Italy’s sovereign debt load is more than 150% of its gross domestic product, compared to about 100% for the UK. It’s also heading into recession next year, the International Monetary Fund warned last week. The spread on Italian government notes to German bunds have widened to about 240 basis points. The leap from about 100 basis points at the start of the year drives up refinancing costs and threatens the survival of many of the small and midsized companies that predominantly rely on short-term bank loans. They are also, of course, facing soaring energy costs from Putin’s war.

Cracks are already showing in the right-wing coalition. The 86-year-old Silvio Berlusconi was caught on camera on the first day of the new parliamentary term writing a note that described Meloni as “opinionated, domineering, arrogant and offensive.” Meloni later told reporters that the former disgraced prime minister had forgotten one thing: “I’m not going to be blackmailed.”

What’s more, Meloni is likely to disappoint hopes that she’ll appoint a steady nonpolitical hand at the finance ministry. Italy’s new finance minister is widely flagged in the media to be Matteo Salvini’s deputy at the League, Giancarlo Giorgetti. That signals not only a political sea change but an economic one too. Alberto Gallo, chief investment officer and co-founder of London-based Andromeda Capital Management Ltd., sees Italy, along with other countries in Europe, moving from a reform agenda espoused by leaders such as Draghi to a greater focus on state capitalism. “That process is going to put pressure on Italian debt,” Gallo says. 

Members of the right-wing coalition have vowed to fully renationalize long flailing bank Monte dei Paschi di Siena and the heavily indebted former monopoly Telecom Italia that’s responsible for Italy’s lagging broadband coverage, and to block the sale of national airline ITA Airways to private equity group Certares.

Perhaps Salvini will row back his demand for big tax cuts and fiscal largesse. Salvini has pushed for extending a flat-tax regime for the self-employed, enabling those with gross earnings of up to 100,000 euros ($98,450) to pay as little at 15%. Oxford Economics calculates the right’s stimulus could add around 1.6 percentage points to GDP growth next year. That increase would also push inflation higher and widen the budget deficit.

Either way, there’s not much room to experiment. UK Prime Minister Liz Truss got her job less than three weeks before Meloni’s victory, and she’s already lost her finance chief and market credibility. Next could very well be her job. That’s hardly a promising template for Meloni.

More From Bloomberg Opinion:

• Italy May Find November Is the Cruelest Month: Marcus Ashworth

• Italy’s Right-Wingers Spook Markets Less Than UK: Lionel Laurent

• Meloni Will Keep Jousting With Salvini. Just Wait: Maria Tadeo

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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