Italian stocks plunge on populist government's plans

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Italian Deputy Prime Minister Luigi Di Maio celebrates on a balcony of Chigi Palace at the end of a cabinet meeting where the government announced its first financial targets, in Rome, late Thursday, Sept. 27, 2018. Italy's stock market has plunged early Friday, Sept. 28, 2018, after the new populist government announced a sharp public spending increase that will push the budget deficit to 2.4 percent of gross domestic product next year. (Alessandro Di Meo/ANSA via AP)

Italy's stock market fell sharply Friday after the populist, euroskeptic government announced a sharp public spending increase that will push the budget deficit to 2.4 percent of gross domestic product next year, risking a collision with the European Union.

The benchmark FTSE MIB dropped 4.6 percent by Friday afternoon, and helped drag down global markets, after the government announced its first financial targets since taking office three months ago.

Italy's government partners, the 5-Star movement and the League, pressed for money to fulfill campaign pledges, namely a basic citizen's income for job seekers and a flat tax. Finance Minister Giovanni Tria, who is politically unaligned, had wanted to keep the budget deficit capped at no more than 2 percent.

The leader of the 5-Star Movement, Luigi Di Maio, called the document approved early Friday by the Cabinet "a maneuver of the people."

"The historic measures are a victory," Di Maio said. "It is not the government that wins, but citizens. It is a maneuver that allows us to relaunch investments and growth."

The 2019 deficit target is a significant jump from the 2018 target of 1.6 percent, set by the former center-left government, but still remains within the 3-percent ceiling set by the EU. The European Union has been pressing Italy to address its deficit in a bid to reduce the country's debt, the second largest in the EU after Greece.

The document calls for spending of 27 billion euros ($31.6 billion), including blocking an increase in value-added tax, launching the 5-Star Movement's basic income scheme, undoing pension reforms and introducing a flat tax.

To pay for the new spending, the government has pledged a tax amnesty, a spending review and possible changes to tax breaks.

Former Finance Minister Pier Carlo Padoan, now a lawmaker for the opposition Democratic Party, called the measure an "irresponsible" U-turn that will allow Italy's debt to grow to the detriment of ordinary Italians and companies.

"As a politician, I say that this government continues to shock, and maybe I should not be shocked, by the incompetence and by the superficiality of the measures it takes," he said.

Carlo Bastasin, professor of political economy at Rome's LUISS University, called the targets "almost a provocation with respect to the European rules."

The government must submit a draft budget to the EU by Oct. 15.