Euro Could Be In Trouble Under Berlusconi's Planned Tax Reforms

by Ulrika Lomas, Tax-news.com, Brussels

22 May 2001

The European Union is carefully watching the activities of Italy's new Prime Minister, Silvio Berlusconi. On course for radically reforming Italy's domestic and foreign policies, there is no doubt in Brussels that Berlusconi's planned tax reforms will present perhaps the biggest danger yet to the fledgling euro currency.

Issues set to spark huge controversy throughout Europe with his five-party coalition and its roots steeped in fascist and anti-immigration polices include Berlusconi's views on tightening up immigration rules and relaxing Italy's progress towards European integration. But what is particularly beginning to worry officials back at the EU's headquarters in Brussels are Bersculoni's proposed sweeping tax cuts that will steer Italy away from the planned economic course of the 12 euro-zone economies which could, said one senior EU official, 'quickly turn into a major crisis for the stability of the euro.'
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The general agreement, known as the stability pact, was that public debt would remain below 60 per cent of GDP and budget deficits should remain below a 3 per cent level of GDP. The aim is to stabilise inflation in order to keep interest rates at a fairly moderate level to ease the introduction of the euro and prevent damaging the economies involved.

Italy's decision to break away from the policy could complicate the issue, particularly when considering the scale of Berlusconi's proposals. With policies based on those of the Reagan and Thatcherite systems, Berlusconi aims to cut income and corporate taxes to levels unprecedented in a large European nation; already Italy's GDP debt ratio has soared to nearly twice that of the agreed figure.

At a press conference last week, Germany's Finance Minister, Hans Eichel, said that Italy should respect the European economic stability pact. He claimed: 'There are very clear agreements within Europe and there is ever stronger coordination between politics, economics and finance. It would be very serious if someone tried to pull away from this set-up.'

Giulio Tremonti, who is expected to be Berlusconi's first choice for Italian finance minister, has told the media that the tax cuts (details of which are unconfirmed) will be implemented on an incremental basis and his government will attempt to bring Italy in line with the fiscal policies of the stability pact. However, during his election campaign, Bersculoni made clear his thoughts on harmonisation policies across the EU, saying: 'Each country should be allowed to run its economy in its own way. I think that competition ought to exist between different budgetary systems of the various EU countries, above all at the level of taxes.'

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