An embarrassing U-turn by the Italian government regarding a 40% windfall tax on bank profits has exposed cracks in Rome’s ruling right-wing coalition, as Italian Prime Minister Giorgia Meloni was forced into an embarrassing climbdown this week.
European bank shares tumbled Monday after a surprise announcement by Deputy PM Matteo Salvini that Italy would impose a 40% windfall tax on net interest revenue derived from the difference between banks’ lending and deposit rates.
The decision, which still required parliamentary assent before being fully implemented, was made at a hasty cabinet meeting on Monday, August 7th, and was prompted by a spectacular increase in bank profits due to a recent rise in interest rates.
A populist measure already taken in Hungary and Spain, the unexpected move blindsided lenders and triggered a nosedive in Italian equity markets, especially among banks, as investors began to withdraw their capital.
By Tuesday, Meloni was forced to backtrack and announced in a press conference that the tax would be capped at 0.1%, leading bank share prices to partially stabilise Wednesday, August 9th.
The original intention of the tax was to direct ‘inordinate’ bank profits into “families and businesses,” a move that was even enjoying the support of Five Star, the opposition party.
While blame for the botched tax has been consigned to Economy Minister Giancarlo Giorgetti, many believe the real initiative for the measure started with Meloni, who wanted to placate populist tendencies among her Lega coalition partners.
There is a growing rift between Meloni’s Fratelli d’Italia and Lega over the administration’s failure to reign in mass migration and the perception that Meloni is growing too close to both the EU and the United States. Critics of Meloni’s rapprochement to the two blocs take her to task for Italy’s vocal support of Ukraine and the country’s intention to leave the Chinese-led Belt and Road Initiative.
Meloni and Lega clashed in March over a failure to implement emergency measures to mitigate the asylum crisis with Salvini’s increasingly vocal criticism of Fratelli over migration in the Italian media. Fratelli officials downplayed rumours of tension by sharing pictures on social media of Meloni and Salvini at dinner over the weekend following this week’s volte-face.
This week’s turbulence has also negatively impacted relations with the more junior coalition member Forza Italia, which maintains an economically liberal worldview and was understood to have been entirely against the proposal.
Overall, the failure to get a handle on the asylum crisis and recent tax mishap has not dented Meloni’s popularity. Opinion polls show that Fratelli would win if an election were held now, to the detriment of Lega.
Meloni and her coalition will now look to straighten course as they prepare the annual Italian budget next week after slashing a controversial social security programme earlier this month.
