Italy: Populist parties attempting to form government consider asking ECB to write off £218bn of country's debt

Coalition hopefuls Five Star Movement and League insist plans for massive financial relief in leaked document are no longer being considered

Tom Barnes
Thursday 17 May 2018 17:10 BST
League supporters at a rally in Milan as Italy prepares for a coalition deal
League supporters at a rally in Milan as Italy prepares for a coalition deal

Populist parties attempting to form a government in Italy have floated the idea of asking the European Central Bank (ECB) to write off €250bn (£218bn) of the country’s debt.

A leaked draft document drawn up by the anti-establishment Five Star Movement and the far-right League party proposed convincing the ECB to cancel debt purchased under the bank's quantitative easing programme.

The idea of requesting the massive relief package surfaced as the two Eurosceptic parties attempt to forge a coalition government after a two-and-a-half-month stalemate in negotiations.

Claudio Borghi, the League's economics chief, has since insisted the plans were no longer being considered as part of the agreement.

The ECB holds around €2.4 trillion (£2.1trillion) of government bonds under its quantitative easing programme.

Five Star and the League - formally known as the Northern League - emerged as the two largest parties following the country's general election in March, although neither group was able to secure a majority.

Representatives from the two parties were due to meet on Thursday to sign off on a joint policy programme that will slash taxes and ramp up public spending, flying in the face of EU fiscal rules.

The League has pledged to introduce a flat tax rate of 15 per cent, which would lower tax revenues by an estimated €80bn per year, while Five Star offered up new welfare payments for the poor worth around €17bn.

On top of that, both parties had vowed to scrap an unpopular pension reform, in a move that could cost the state a further €15bn.

News of the draft accord has sparked concern among senior figures in Brussels, as the bloc braces for what is likely to be its biggest challenge since the Brexit vote two years ago.

European Commission vice president, Valdis Dombrovskis, told the EU parliament on Thursday Italy's new government should stick to fiscal discipline and keep reducing public debt.

“This is our message to the new government. It's important to stay the course,” Mr Dombrovskis said.

Italy already has an enormous national debt equivalent to 130 per cent of its GDP, putting it second only to Greece inside the European Union.

EU budget rules require it to cut the debt pile aggressively under the “fiscal compact”, which both parties want scrapped.

The parties said on Tuesday they want to “re-think” the eurozone's fiscal rules “in the spirit of returning to the pre-Maastricht set-up”, a reference to the treaty which laid the groundwork for monetary union.

The leaked document also proposed “economic and judicial procedures that allow member states to leave monetary union”, but the parties swiftly issued a statement insisting their programme did not contain plans to scrap the euro.

Both groups have voiced criticism of the single currency, although Five Star has moderated its position considerably in the last year, rowing back on a previous plan to hold a referendum on Italy's membership of the euro.

The League, however, still wants to leave the eurozone as soon as politically feasible.

Although the two parties look set to agree a coalition deal, there is still no word on the issue of who will become prime minister.

Neither League leader Matteo Salvini nor Five Star leader Luigi Di Maio wants the other to get the job and are looking to identify a suitable figure free from ties to either party.

Meanwhile, outgoing prime minister Paolo Gentiloni told a meeting of EU leaders in Bulgaria that he and other leaders were worried that fundamental issues such as the need to safeguard public accounts were now up for political discussion.

Additional reporting by Reuters

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