Agreeing to a big deficit budget on Thursday evening, Italy's government took another step towards financial oblivion.
Under the new budget, the Five Star Movement-led government will target deficit spending of 2.4 percent over the next three years. That's significantly higher than what the independent fiscally conservative economics minister, Giovanni Tria, had hoped for. With Italy's debt already at 130 percent of GDP, the nation can ill afford even this.
Yet what's most striking about this new budget is where the additional spending will go. Because it isn't going to much needed market liberalization, but instead towards boosting entitlement spending. Specifically, the $30.1 billion in new spending will go towards a guaranteed $905 per month income for poorer families, towards lowering the retirement age, and towards deferring a sales tax increase. For a demographically challenged nation already buried in debt, this budget is just not feasible. Indeed, the only thing holding Italy above the demographic precipice is its high immigration intake. But with an anti-immigration party also in government alongside the Five Star movement, immigration is set to continue falling.
It's a recipe for big trouble. The market reaction evidences as much. Bank values have been plummeting on Friday and the Italian 10-year bond price is spiking upwards. And the real tragedy here is that the Five Star clowns are reversing progress made by their predecessor government to bring the deficit under control and restore market confidence. Consider the Bloomberg chart below, which shows how the 10-year bond is trending in a very negative direction.
What happens next?
Well, the European Union is almost certain to protest this budget over its disregard for fiscal reality. But unless the EU is willing to sanction the Italian government — which is unlikely — the Five Star league will be able to retain their selfish prize. But as I say, Five Star's stupidity cannot be overestimated. At least the Titanic's crew made a mistake in crashing into an iceberg. The Italian government is actively targeting an economic iceberg in the absurd belief that they can ice skate on it rather than drown.