If there is 1 country in the European Union (EU) where the principle 'see, then believe' applies, it must be Italy. The 2 euro-skeptical parties (the Five Star Movement and Lega Nord) have signed a coalition agreement and it looks very likely that these 2 parties will put together the new government in Rome. This could have consequences for monetary policy in the eurozone and the value of the euro.
From the coalition agreement It turns out that the parties have some plans that one wonders how the country will finance. For example, they want to introduce a basic income of almost €800 per month (for everyone), something that is estimated to cost €30 billion per year. The two parties also want to increase government spending and reduce taxes.
Wouldn't this boost the budget deficit and national debt, which are already far above the EU norm? Yes, but since both parties don't like the same EU budget rules, it won't bother them. If Italy knowingly violates European rules, there is a good chance that this will lead to tensions between Rome and Brussels (and certainly between Rome and Berlin).
Living at the expense of the Germans
Brussels will urge Italy to stick to the rules, and Berlin will become downright irritated. In Germany There is already a feeling that the Italians are living at the expense of the Germans. These new plans will only strengthen that feeling. Especially because the leaked plans show that the new Italian coalition wants the European Central Bank (ECB) to write off the €250 billion in Italian government bonds that the bank has bought in recent years. That would be grist to the mill the anti-euro party in Germany, the AfD.
In response, it is quite possible that Angela Merkel will be even tougher in the negotiations on the future of the eurozone (in June). The heads of state and government of the euro countries will then meet to discuss the future design of the euro house. Plans for a transfer union, an almost automatic flow of money from the strong euro countries (such as Germany) to the weaker countries (such as Italy), are high on the agenda there.
With the plans of the new Italian government, it may be a bridge too far for Germany to agree. And a failed euro summit could lead to new fears about the continued existence of the currency, something that will not benefit its value.
Consequences are already noticeable
The consequences in that area are already noticeable. The euro declines in value when the prospect shows that a large euro country wants to ignore all the rules that are the foundation of the currency union. If the euro summit in June fails, it is also possible that uncertainty will arise in the market about Italian participation in the euro in the future.
Both parties are Eurosceptic and believe that the euro is the source of all the country's economic problems. Both do not rule out that Italy will have to leave the monetary union, even if only as a last resort.
Tighten the reins less tightly
The above does not look like an environment in which the ECB would like to tighten monetary policy decisively. It would not surprise me if the ECB tightens the monetary reins less quickly and less tightly than the market assumes. It stands for that the first rate hike will probably not come until sometime in the fall, if not the winter of next year. And the buying of government and corporate bonds could easily last longer than the end of this year.