It’s often said that politics is the art of the possible, and Italian Prime Minister Giorgia Meloni learned that valuable lesson this week with the surprise tax on banks. Just a day after his government announced a new tax on extraordinary profits from financial institutions, the executive was forced to back down and slash its tax collection ambitions from the €4,500 million estimate by analysts to a maximum of €1,800 million. What can you achieve? Now?
The disengagement highlights governments’ limited power to implement whatever measures they deem appropriate. When the market judges they’ve gone too far, investor pressure is palpable. This Tuesday, after learning the new interest rate, Italian banks plummeted in the stock market, losing 9 billion euros and even infecting a large part of the sector in Europe, from the Spanish Banco Santander, the German Deutsche Bank or the French Société Générale.
The outflow of funds, confirmed by media around the world, was too much for Rome, which on Tuesday night watered down the rule, clarifying it would affect just 0.1% of each bank’s assets. Why was there such a strong market reaction? For Ignacio de la Torre, Arcano’s chief economist, Meloni entered particularly tricky territory. “Taking action against any sector is not the same as taking action against banks.” Businesses are the main source of finance in a medium-sized economy and are particularly relevant for SMEs. If the bank goes under on the stock market as a result of the announcement of an unconfirmed measure, the industry’s access to the capital market will be made more difficult, which means that a credit slump can be expected, which would slow down economic growth and thus employment… This is how the vicious circle is understood, the caused the correction by the Italian government,” he explains
Former Italian Finance Minister Lorenzo Codogno agrees with the criticism. “Banks are easy targets for populists, and attacking them draws political support. However, disregarding the need to provide a stable fiscal and competitive framework to attract investment carries risks and will result in a permanent reduction in the attractiveness of the Italian economy and a change in the availability of credit, especially for SMEs, the backbone of the Italian economy. Goal.
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There are other recent and more distant examples of how markets have the potential to thwart, or at least influence, government plans. The most striking thing of recent times has been that the British Prime Minister, the Conservative Liz Truss, has come out on top. And, paradoxically, it was triggered by the opposite reason for the corrective measures against Meloni: a tax cut deemed too aggressive — at €50 billion, the largest in the country in the last half century — that also benefited the highest income earners. with the abolition of the maximum rate of 45% of income tax for taxpayers who earn more than 170,000 euros per year.
The market reaction was violent. Doubts about the sustainability of Britain’s debt came to the fore as investors fled the debt crisis and funding costs rose. The value of the pound sterling plummeted. There were even fears that it would affect pensions. In order to stabilize the situation, the Bank of England launched a bond purchase programme. But it was too late. Truss threw in the towel and left office 45 days after arriving at Downing Street. This made him the shortest-serving Prime Minister in UK history.
His farewell speaks of the power of markets, capable of achieving what no political opposition could have achieved alone, at least without inciting a massive mobilization in the streets. In this case, there was some consensus that reversing the massive tax cuts was the best thing that could happen to the UK economy. However, the delegation of the role of what is positive and what is negative in the markets, that is, to key players in the functioning of the economy who were not chosen in the ballot box, raises questions.
Spain in the peephole
Pressure doesn’t always work. Like Meloni, the Pedro Sánchez government announced a new bank tax last July. And as in the case of the Milan Stock Exchange, the stock market has seen sharp falls, with the Madrid sector plummeting nearly 5%, losing more than $5,000 million in market cap in a single day. The Spanish government’s intention is to collect 7,000 million within two years between this tax and the tax levied on energy companies, an amount more than what made Meloni balk. After the storm, investors digested the news and Spanish banks are trading at a higher price today than when the interest rate was announced.
The story, on the other hand, shows other episodes in which Spain too knelt before the harassment of the markets. In 2012, in the midst of the sovereign debt crisis, with the risk premium skyrocketing and interest payments becoming unsustainable, Mariano Rajoy’s government enacted a sweeping package of measures, with drastic cuts to civil servants, the unemployed and dependents, and tax hikes to in two years to achieve an adjustment of 65,000 million euros,
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