Discover more from The French Dispatch
Meloni Blindsides Markets With Surprise Windfall Tax
Italian Prime Minister Giorgia Meloni recently announced a dramatic windfall tax on Italian banks in bid to ease pressure on households
As part of a government decree, the Italian government led by Prime Minister Giorgia Meloni introduced a windfall tax on lenders’ profits resulting from higher interest rates, with a planned levy of 40%.
The tax, which will be applied to the net interest revenue derived from the difference between banks’ lending and deposit rates, was approved in a hasty cabinet meeting late Monday night and announced in a press conference. The proposed measure would, however, need parliamentary approval within 60 days.
However, the decision to create such a tax is not a unicum in Europe. In 2022, Hungary’s government decided to pass windfall taxes on banks and large private companies’ “extra profits” as a strategic move to control its budget deficit. Spain followed suit shortly after, approving a so-called “banking tax,” which imposed a 4.8% charge on banks’ net interest income and commissions above €800mln.
Following the announcement, the shares of the largest Italian banks fell roughly 6-11% in Milan’s Stock Exchange. To calm the market’s adverse reaction, the Italian Finance Ministry released a statement late on Tuesday, guaranteeing that the tax would be capped at 0.1% of the assets. According to analysts, this cap would greatly help banks to better manage the levy.
The statement constitutes a backtrack on what Italian Deputy Prime Minister Matteo Salvini said the day before during the press conference, claiming that banks were unfairly profiteering from higher interest rates.
Thanks to the statement from the Finance Ministry, the shares of the major Italian banks gained around 3% on Wednesday morning.
Raised amid concerns and critiques due to raising interest rates on deposits decided by the European Central Bank (ECB), the tax is expected to amount to around €2bn. The creation of the tax follows the political pressure on the right-wing coalition supporting Meloni’s government to do more to provide breaks to households hit by raising interest rates and inflation.
In fact, It’s no surprise that, according to the government’s plans, the revenues are expected to fund tax cuts and relief for holders of mortgages with fluctuant interest rates.
The Minister of Industry Adolfo Urso underlined that the windfall tax would “bring back justice.” to the Italian people, and in a video published on Wednesday on social media, Prime Minister Giorgia Meloni further insisted that the tax affects only “unfair margins” of revenues, claiming that such revenues will “finance families and businesses.”
The measure managed to gather some opposition support. Giuseppe Conte, leader of the populist Five Star Movement, said that it was “better late than never,” while some Members of the centre-left Democratic Party also expressed support for the decision. Surprisingly, left-wing parties from abroad welcomed the tax.
However, economists and other opposition parties in Italy fiercely criticised the move, stating that it would hit small banks the hardest, who, in turn, would have to raise interest rates for families and people who hold mortgages with non-fixed interest rates.
In addition, experts believe the windfall will have other consequences. According to early analyses, the windfall tax, coupled with higher interest rates, could severely damage the business models of banks, which, especially in Italy, are vital for the economy.
Considering the exceptional nature of the windfall tax, concerns have also been expressed regarding the potential distortive consequences on the banking market and the creation of a dangerous precedent of arbitrary taxation imposed upon a specific sector.
Finally, economists suggested that this tax might also be unfair as its revenues would be used to provide relief to mortgage holders who were well aware of the risks associated with fluctuating interest rates.
Thank you for reading the French Dispatch! If you liked what you read, you should like this post and subscribe to the newsletter by clicking/tapping the button below:
And if you’d like to contribute a coffee or two to help fuel my coverage of the wild world of politics, feel free to click on the picture below: