Meloni’s Italy is being heralded as a possible example of what a Le Pen Government could do in France. But what is the Meloni playbook? Pietro Candia has published this note for clients to answer that question.
Key takeaways
- There is much discussion about whether Le Pen would follow the “Meloni playbook” by reassuring markets.
- The reality is that the Meloni playbook will be seriously challenged now, as fiscal adjustment pressure is only just beginning for both Italy and France.
- So far, Meloni has avoided painful fiscal measures because EU fiscal rules were on hold. Now, fiscal rules are back, and Italy will face an excessive deficit procedure.
- Italy needs to find savings to the tune of 0.5% of GDP in the structural balance for 2025. Lega, Forza Italia and the opposition will use this opportunity to attack Meloni and blame her for Italy’s return to austerity.
The Meloni playbook
Since she formed her Government, Giorgia Meloni has been very successful in accommodating the demands of her electorate without spooking Brussels and financial markets.
The so-called “Meloni playbook” could serve as a template for Rassemblement National to govern France without causing panic among investors. But what is the Meloni playbook?
On the economy, Meloni did relatively little. She adopted measures like tax cuts for low-income workers and a windfall tax on banks, which had to be significantly watered down. The Government also took steps to contain the Superbonus, whose costs were spiralling out of control.
Meloni has handled the implementation of the Recovery Fund relatively smoothly. After renegotiating the plan with the European Commission, the Government will have an easier time meeting the deadlines and getting the payouts.
Meloni was more active on political and cultural issues. The Italian Parliament recently approved a reform that gives more power to the regions, which was a key demand of Lega.
The Government is also making progress on reforming the justice system, a key demand of Forza Italia, and on constitutional reform that gives more power to Italy’s Head of Government, a key demand of Fratelli D’Italia.
More importantly, the Meloni Government has also taken a very extreme stance on many cultural issues to please the far-right electorate. For example, the Government is being accused of having further repressed media freedom and of limiting women’s and LGBT rights.
So far, voters have liked the Meloni playbook. As we expected, the European Parliament elections have been a huge success for Giorgia Meloni. With 28.8% of the votes, Fratelli d’Italia (FDI) did better in percentage terms than they did in the 2022 parliamentary elections.
The challenges come now
The main thing that allowed Meloni to implement her playbook so successfully was the fact that EU fiscal rules remained suspended for all of 2023 and were only loosely applied in 2024. Now, the EU fiscal rules are back in place, and Italy will be required to get its 2025 Budget back in order.
Yesterday, the European Commission took the first step to open an excessive deficit procedure against Italy. The European Commission’s spring forecasts, released in May, clearly showed that an EDP was inevitable.
As we flagged, the European Commission’s numbers significantly differed from the estimates the Italian Government made in its April Budget update.
The European Commission estimates the deficit to fall to 4.4% in 2024 and swing back to 4.7% in 2025. The Italian Government assumed, instead, that the deficit would fall to 4.3% in 2024 and drop further to 3.7% in 2025.
Why the discrepancy? First, the European Commission assumes that the Italian Government will, in 2025, extend some of the fiscal support measures that the Government introduced with the 2024 Budget law.
The Government, even yesterday, has repeatedly promised to extend those measures in 2025. However, it has not yet found space in the Budget to finance these tax cuts, which is why its earlier Budget forecast did not include them. The European Commission thinks that when push comes to shove, the Government will use the additional deficit to keep the measures in place.
Second, the European Commission does not consider Italy’s plan to raise €20 billion between 2024 and 2026 by selling several state-owned assets credible.
According to recent press reports, the Government is reconsidering its decision to sell a stake in Poste Italiane, which means that the European Commission was probably right to be sceptical.
It is unsurprising that right after the EDP was announced, the Italian press wrote that the Government was planning to revise its 2025 deficit projections upwards of 4/4.2%. The revision is only meant to bring Italy’s own assessment closer to the Commission’s assumptions for their EDP report.
Consolidation required
Under the EU’s fiscal rules, a country subject to an excessive deficit procedure must improve its structural balance by at least 0.5% of GDP annually.
The European Commission expects Italy’s structural Budget balance to be -5% in 2024 and -5.3% in 2025. This means that under an excessive deficit procedure, Italy would have to bring its structural Budget balance to -4.5% in 2025, which is 0.8% lower than it would otherwise be.
However, the agreed text said that the Commission may consider the increased cost of interest due to investments for the twin transition, geopolitical challenges and the general interest rate environment when setting the adjustment needs.
This is why the Italian press is suggesting that the Commission will only require a consolidation of 0.5/0.6% of GDP annually for seven years, which means around €10/12 billion worth of cuts per year.
At tomorrow’s Eurogroup, the Commission will give non-compliant Member States their fiscal reference paths. By 20 September, Member States must present their updated midterm fiscal plans, taking into account the Commission’s recommendation.
Member States must submit their 2025 annual Budgets by mid-October. Between October and November, the Commission must approve both the annual Budgets and the midterm fiscal plans.
Implications for Meloni
If Meloni wants to maintain a constructive relationship with Brussels and keep markets happy, she will now be required to pursue a steep fiscal consolidation. This means she could have to withdraw the income tax cuts or eliminate other spending items.
Whatever she does, it will be politically very unpopular. Her coalition allies, Lega and Forza Italia, will put all the blame for consolidation on her, while the opposition will argue that she is bringing austerity back to Italy.
No matter how hard Meloni tries to deflect attention and talk about cultural issues, ultimately, her far-right electorate will not approve of Meloni’s austerity measures, and her reputation will be tarnished.
Conclusion
The reason why a far-right populist leader like Giorgia Meloni managed to govern effectively without spooking markets is largely because EU fiscal rules were on pause. Now that fiscal rules are back and Italy is required to make significant Budget cuts, Meloni’s playbook will come under real pressure.
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