THE END OF MELONI?
THE END OF MELONI?
DISCLAIMER: nothing in this article is or is meant to be "financial advice" under current legislation. drink fluids, eat healthy and exercise.
I had some doubts about how the new government of Italy would develop, see my previous post on the subject. But here we are, not one year into the current government, and it all falls apart in one day.
First an explanation: by “fall apart” I do not mean that the government falls, loses parliamentary votes, suffers internal defections etc. If anything, the one speculative thoughts I had, that Meloni would last the legislature, is the less dented of my opinions, expectations and desires. In fact, I surmise that between declaring the experience ended and proclaiming a snap election, or the present predicament, the first was the better alternative... provided she had an inkling about what happened.
What I mean is that what made Meloni "something else" is lost, and probably irretrievable.
The incident
In a council of minister on August 7th, the Meloni government passed an “Omnibus” decree, containing an hodge podge of varied measures. That has been rather a custom in Italy, and I hoped that Meloni would break the mould and sent the baying wolves vying for media headlines packing, but alas for me and for her, she did not.
Here are the fifteen (!) measures decreed:
what
the omnibus decree provides for:
1) stop to isolation for
COVID positive individuals
2) bonus for investors in
semiconductor research
3) measures against increases in the price
of flights
4) changing exposure limits to 5g networks
5)
refunds for tour operators for fires in Sicily
6) no limit to
remuneration of executives hired for the Sicily strait bridge
project
7) increase in numbers for taxi licenses
8) golden
power for critical technologies
9) blue crab catch funds
10)
new anti-relocation rules for companies that received public
funding
11) aid for the wine sector
12) funds coming for
street maintenance for towns under 10.000 population
13)
unemployment fund for former Alitalia workers
14) increased
penalties for arsonists
15) tax on banks extraordinary profits.
[The press conference is available here.]
I will leave the bank tax last, since it's the one which attracted the most media attention, but the Decree itself is a blueprint on how NOT to plan economic intervention, organize government functions, and generally make people like me more confident about my country. First off, the very idea of a 15 point list gives me migraine. Such an order of business usually means “rubber stamping” things that few or none of the people raising their hands have any inkling of, as perfectly depicted by Cyril Northcote Parkinson in his wonderful book “Parkinson's law”.
I would like to bring your attention to points 2 and 10. This is one of the Italian classics, two mediocre if not stupid measures which combined become on one hand poisonous on the other self cancelling; Like an impact between a particle and its antiparticle, the output is different from the input. On the one hand, Meloni's government is promising money to investors in the semiconductor sector, on the other hand it's indicating that whatever resources the government puts in, it gets immediately clawed back in case the venture proves unsuccessful and the company relocates the production/research outside italy. And the limit for outside investment coming in is “higher than ONE BILLION EUR” (!).
Others are the usual “summer's list” of attention seeking measures, like the 50 million towards small town street maintenance. For the record, towns with less than 10.000 inhabitants were slightly less than 6.700 in 2021, which would ballpark the average help at about 7.500 EUR per town, and anyway it would be an intra-public entity transfer: in no shape or form would taxpayer pay less.
Banks? What are those?
Alas, there is also one of the worst economic policy measures devised in Italy, and Vice Premier Salvini starts talking about that at about minute 21:00 into the conference. He attributes the measure to Minister Giorgetti, a fellow Lega member, and also well acquainted with Mario Draghi on top of being one of the ministers in the Draghi government. That would at least have an independent observer think that Giorgetti had all the contacts if not the knowledge to engineer something reasonable...wrongly.
Now of all the members of this government Meloni could have given the task of presenting this economic measures, Salvini was surely in the lower end of the pile, for a number of reasons. He was the architect of the famed “Conte 1” government, a.k.a. The “green – yellow” government, having left the right.wing coalition he had presented Lega with in the elections. Whilst a canny politician, he has no track record of having any familiarity with sound economic concept, although admittedly this is almost a must in Italian politics. And during the conference he amply proves it.
He is speaking of “extra profits” being due to the fact that while rates have risen and consequently variable rate mortgage rates have risen accordingly (insert your own “Duh” here), but he also rails against the fact that banks have avoided offering to pay interest on individual cash balances. Now, to the best of my knowledge, even in former high rate times, the fact that banks here paid interest on daily cash balance was an international oddity. Saving accounts are offered worldwide, with different expiries, and anyway all savers can buy government short term paper on the market easily, so if that was the problem it was a financial education / MIFID problem, but for the life of me I cannot recollect any supervising authority or politician going public big time with “don't leave idle cash on your account, buy BOTs!”.
Salvini also rehashes the old saw according to which “we tax X to fund Y”, which while a darling of politicians it is and always was basically poppycock: all liabilities fund all assets. Any income covers any expense. Deal with it.
On top of that, there is a definite trouble with the intended tax base, i.e. the interest margin. For one, for all the reference to standard accounting, good luck linking the root justification for the tax (“unjust” profits derived by rate rises) to the actual numbers. But that's not where the law of unintended consequences slaps this government in the face.
Size matters
The basic answer to the concept of “excessive profit” is that in order to be enduring, there should be no new entrants. And if the alleged return on investment is high, everyone and his uncle will give it a try. Naturally, provided that the moat, alligators, glacis, hot oil and hot sand falling from theramparts do not succeed in keeping them out. In this case, the tax itself is part and parcel of the barriers to entry. Big players get much of their income from activities OUTSIDE the field of traditional banking: Asset management and “consulting”, initial public offering, underwriting etc. All of these activities matter less for smaller entrants, who are effectively punished for being smaller. By designing the tax that way, it's unclear to me if a big Italian bank head should be sad or happy: After all the real income anomaly of the Italian banking sector remains well hidden in plain sight.
Conclusions
Given the above, after some huffing and puffing and changes to the law, I do not expect the big banking groups to be overly upset. After all it's either client or shareholder money, it happens to all domestic player equally, and anyway the sector is so entwined with the state sector to make any reprisal pointless. If anything the damage comes from another angle, and it has nothing to do with banks.
The Italian economy has a big problem In new enterprise formation. Entrepreneurship needs a willingness to run risks in order to achieve a return, both in economic terms as in satisfaction. This tax basically says that the government will decide if and when anyone has “earned too much”.... after the fact. If there is any factoid liable to LOWER economic activity, I don't know it.
Think about enterprise formation as if it was a “skewed normal“ distribution of returns, with the center at a return slightly above free risk rates and a fat left tail, meaning that out of a thousand new firms, many more don't live to see their third year than the number of those proving thrice as profitable than risk free rates. If the Emperor appropriates a big part of “unjust profit” ex post, the ex ante result is this: the expected return of a newly formed random company, all else being equal, is LOWERED, and at times the random expected return may fall BELOW the risk free rate. In layman terms, entrepreneurs would be better off buying the risk free than setting up companies. And don't get me started on what such a measure does in terms of risk premium.
So it's not the banking sector that worries me. It is simply that, again, Italy returns to be the land of lost hope.
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