The Italian government’s blunder in introducing an unexpected tax on banks has severely damaged Prime Minister Giorgia Meloni’s efforts to present herself as the fiscally responsible steward of her country’s economy.
A partial slide late Tuesday night helped bank stocks regain some of their lost ground after a precipitous plunge, but the tumultuous episode has tarnished the reputation of Meloni’s right-wing coalition.
“The idea that the government is going to become mainstream, move towards the center and take responsibility on the economic side is now being somewhat undermined,” said Lorenzo Codogno, a former senior official at Italy’s finance ministry. “It aroused suspicion. . . There may not be easy sailing.”
Since taking power in October, Meloni has sought to reassure concerned financial markets that she is in safe hands and has distanced herself from her past as a riotous opposition arsonist.
The disastrous, short-lived tenure of Britain’s Conservative leader Liz Truss – just weeks before Melonis took office – served as a cautionary tale the Italian leader took to heart. Her government’s prudent first budget received great applause.
But the clumsy and messy attempt to impose an unexpected tax on banks’ net interest income – which Treasury Secretary Giancarlo Giorgetti has repeatedly rejected in the past – has raised questions about Meloni’s understanding of the impact of populist policies on the market.
“They probably believed that this was a move against a relatively unpopular opponent — like banks — that could easily be sold to public opinion without major impact on markets,” said Lorenzo Pregliasco, founding partner at political polling firm YouTrend.
“They didn’t think it would generate that much backlash,” he added. “That was a big misjudgment.”
In recent weeks, Meloni’s right-wing government has come under fire at home as the implementation of a €191.5 billion EU-funded post-pandemic recovery plan fell far behind schedule and EU funds stalled got. The economy has also lost momentum, with gross domestic product unexpectedly shrinking by 0.5 percent in the second quarter.
Meloni has also faced criticism and protests for phasing out a controversial “civil income” welfare scheme that gave unemployed Italians a basic income but employers complained it discouraged people from taking jobs.
Analysts say Meloni has been attacked for her “poor phobia” and may have wanted to make a political gesture to bolster political support, particularly among her right-wing constituency.
“Meloni felt weakened by accusations that she didn’t care about weaker households,” said Francesco Galietti, co-founder of Policy Sonar, a Rome-based political risk consultancy. “When she abolished universal basic income, she was accused of having no heart and not caring for the poor.”
Matteo Salvini, Meloni’s junior coalition partner, unveiled the tax at a late-night press conference on Monday, but gave few details © Remo Casilli/Reuters
“This move from Robin Hood is her attempt to make a comeback,” Galietti said.
Pregliasco said the government appeared to “want to appeal to the anti-establishment, populist, right-wing constituency that basically hates banks.”
Economists said the move also reflects the government’s growing concern to find new sources of revenue as it works to prepare next year’s budget amid tight fiscal constraints.
“It’s probably a sign of desperation,” Codogno said. “In the fall they have to prepare the household and have no money to finance anything.”
The moves certainly appeared to be the actions of a government that spontaneously improvised its policies, unaware of the potential impact on banks, the economy, or broader international sentiment towards Italy.
Meloni’s most recent coalition partner, Matteo Salvini, leader of the right-wing Lega and the country’s infrastructure minister, unveiled the tax on Monday at a late-night press conference from which both Meloni and Giorgetti were conspicuously absent.
“The government suddenly introduces a 40 percent random tax that has the potential to destroy the sector just before you go on vacation and so on.” [finance] The minister doesn’t appear to explain what’s going on?” said a bank manager in Milan.
Salvini gave little specific information on how the measure works and did not disclose any figures. He merely announced a move that he claimed would help ordinary people suffering the effects of high interest rates.
“It was very clear that this was a political measure and not a technical one,” Pregliasco said. “Salvini wanted to show personal responsibility – and that the league is not a spectator, but can help shape the government’s agenda.”
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It was only on Tuesday night – after the market chaos – that the Treasury finally released a damage limitation statement, saying the tax would be capped at 0.1 percent of bank assets. The cap had not been mentioned in either of the two different versions of the policy circulated earlier in the day. The final wording of the tax still needs parliamentary approval, with strong lobbying from banks expected.
But the role of Giorgetti – a member of Salvini’s league – remained unclear as he told those close to him that he did not support the original move, while members of Meloni’s circle insisted he did. A spokesman for the minister later claimed he was “fully in favor”.
The move came just weeks after the national banking association ABI and the Treasury Department agreed to mitigate the impact of rising interest rates on adjustable-rate mortgages, which account for about a third of total home loans.
People close to the discussions said they were stunned to learn about the windfall tax “on TV”.
Meloni defended the tax on Wednesday but did not comment on the market reaction. In a short video, she said the measure was not a tax on a “legitimate margin” but rather a “tax on an unfair margin”.
In Italy, the tax was welcomed by some of Meloni’s opposition rivals, including the populist Five Star Movement, which had itself called for such a measure, and members of the left wing of the centre-left Democratic Party.
But the international damage will be difficult to repair. “This has raised concerns about how financially responsible – and financially conscious – the current government might be,” Pregliasco said, adding that the affair would “dim the perception” that “the Meloni government was unlikely to take any crazy action “.
Codogno said the “Soviet-style tax” – and the uproar it brought – exposed strong populist impetus within the right-wing coalition.
“It just revealed her true attitude,” Codogno said. “Probably this government is not as pro-market as people thought.”
Additional reporting by Silvia Sciorilli Borrelli in Milan
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