June 27, 2018 / 11:23 AM / 3 months ago

Italy's new government is no threat to euro, eurosceptic senator says

ROME (Reuters) - Italy’s new government will do nothing to undermine the euro and investors have no reason to fear its agenda, a prominent eurosceptic senator from the right-wing League party said.

The senator, Alberto Bagnai, needs to reassure markets. He is the author of “The Sunset of the Euro,” written in 2012, which advocated the end of the single currency.

Some analysts say his influence on policy could help bring about a market crisis, even an “Italexit”. When he was named head of the Senate finance committee last week, an important post for guiding legislation through parliament, investors dumped Italian stocks, bonds and the euro.

But in an interview with Reuters, the 55-year-old former economics professor said markets misunderstood his intentions and those of the government.

“This government, with this program, will do nothing to attack the euro,” Bagnai said. While he did not renounce any of his academic criticisms of the single currency, he said, political reality was another matter.

“To say the euro is a good idea is like saying the earth is flat, but then there is political responsibility,” he said. “We are politically responsible and that means not imposing an academic agenda on a parliamentary majority. This is a crucial point and needs to be understood.”

The League formed a coalition government this month with the anti-establishment 5-Star Movement, three months after an inconclusive election where 5-Star emerged as the largest party.

Their joint program, drawn up after weeks of negotiations, contains nothing that calls into question Italy’s membership of the single currency. Nevertheless, markets remain nervous and Italian bonds have come under frequent selling pressure.

“PRE-MAASTRICHT”

Both parties have a history of euroscepticism, and their policy agenda includes steep tax cuts and higher spending on welfare. That could drive up the budget deficit and the world’s third-largest government debt.

Five-Star has ditched its anti-euro rhetoric over the last year, but the League’s election manifesto called for a return to a “pre-Maastricht” situation - that is, before the treaty that led to the single currency.

“It’s not in our joint government program because 5-Star didn’t want it and most Italians don’t want it,” Bagnai said in his Senate office in central Rome. “We got 17 percent and 5-Star got 33 percent. End of story!”

He said the League, whose base is the small and medium-sized companies of northern Italy, was “intrinsically pro-business and pro-market”. Markets would warm to the government when it began implementing its policies, he said.

The coalition will enact its program “gradually, over a five-year horizon,” to safeguard public accounts, he said. If growth holds up, it may even keep the deficit-reduction targets of the previous administration.

But he also stressed Italy would fight to change EU fiscal rules to allow more scope for public investment, and promised a more combative approach to negotiations.

“Germany and France deserve our admiration because they have been in Europe defending their interests, and that is right,” he said. His normally hushed voice rose on the final word of that sentence.

Stripping investment spending from calculations of countries’ budget deficits would result in more balanced, less export-led growth in Germany and was also in the interests of the whole of the euro zone, he said.

“Markets are nervous because we still haven’t been put to the test,” Bagnai said. “People always talk about the deficit, but they don’t talk about what we want to do to tackle tax evasion, corruption and simplify bureaucracy.”

Editing by Larry King

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