Giorgia Meloni becomes the new Prime Minister of Italy. The right-wing politician has concrete plans for her term of office that will affect Germany and the EU – mostly not good ones.

The Fratelli d’Italia party won the parliamentary elections in Italy yesterday by a clear margin. Lead candidate Giorgia Meloni is sworn in as the country’s next prime minister, succeeding former ECB chief Mario Draghi. She will take over some of the reforms that have been started from him, as well as the obligation to use billions of euros from the EU’s Corona recovery fund wisely. In addition, the 45-year-old also has her own economic plans, the effects of which extend beyond Italy.

Italy pressed 2.77 trillion euros in debt at the end of July. Within the EU, this is only surpassed by France (2.9 trillion). Italy is also in second place when it comes to the ratio of debt to gross domestic product. The 135 percent of the boot state is only topped by Greece (189 percent).

As with all countries, Italy’s debts shot up during the Corona crisis. However, Draghi recently managed to curb the debt. This year, the absolute debt rose more slowly than the gross domestic product, so that the debt ratio fell from 151 to just 135 percent.

During the election campaign, Meloni promised that the national budget would be safe in her hands. Investors have their doubts. They point to Meloni’s plans for tax cuts, a lower retirement age and an amnesty in tax processes. All of this would significantly reduce state revenues. Experts expect an additional burden of at least 80 billion euros.

The stock exchange reacted to Draghi’s resignation with rising interest rates for Italian government bonds – a sign that investors rate the risk of default higher than before.

Specifically, Meloni wants to change the EU stability pact. This is the agreement, which, among other things, provides for a maximum debt of 60 percent of GDP and a maximum of new debt of 3 percent of GDP per year. The latter clearly tore Italy last year with 7.2 percent of new debt. Draghi had planned 5.6 percent for this year. Meloni wants government aid to avert the energy crisis, for example, not to be included.

The EU is investing 800 billion euros to rebuild the European economy after the Corona crisis. Italy is entitled to around 200 billion euros from this pot. In order for these to flow, Meloni’s predecessor Draghi had to submit a national reconstruction plan to the EU Commission, which was also approved with a few detailed adjustments.

Meloni now wants to change this fixed plan. She wants to use EU money to ease the impact of the energy crisis on Italy. The EU takes a critical view of this. Although funds could be used to reform the country’s energy market or expand renewable energies, direct help to households is not permitted with the reconstruction money. But that’s exactly what Meloni would like to do.

What this threatens is a dispute with the EU. There are no plans for major changes to the agreed plans – each country had to submit and have its own reconstruction plan approved. The top priority is that the funds are intended for reforms and not for state aid. If Italy misappropriates funds, this should complicate negotiations on future aid from the EU. In the worst case, countries like Poland and Hungary could lose EU funds.

Last year, Italy was one of Germany’s most important trading partners. Compared to the pre-Corona year 2019, the turnover of all imports and exports to Italy increased by 12 percent to 140 billion euros. Italy is Germany’s sixth most important trading partner.

Theoretically, both countries have good chances of expanding this cooperation. German companies are looking for new suppliers to make themselves less dependent on China and are increasingly finding them in Italy.

But stronger trade relations, which the federal government and Draghi’s government also wanted to promote together, depend on the economic development in both countries, especially on interest rates. If Meloni’s policy in Italy causes the state’s creditworthiness to suffer, interest rates for companies will also rise. In addition, Meloni wants to make investments by foreign companies in the country more difficult, for example through mandatory tax advance payments. “This can quickly become a stumbling block for economic development in the euro zone and thus for important markets of German companies,” says Volker Treier, head of foreign trade at the German Chamber of Industry and Commerce, to Wirtschaftswoche.

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