Giorgia Meloni, the hardline Italian Prime Minister, who has gained support from her more moderate counterparts in Brussels, is now making waves in her own country.

On August 8, Italy’s announcement of a 40% windfall tax on banks caused a 2.7% drop in Europe’s main banking index. This unexpected move surprised traders but was later softened within 24 hours.

Airlines have also rejected other policy measures, such as a government plan to limit prices for flights to specific destinations. The Italian government will meet with airline executives next month, and the European Commission is already examining whether this measure complies with EU law.

Despite concerns that Meloni, the country’s first female PM and leader of a far-right party since World War II, might push Italy to the fringes, she has largely aligned with mainstream political positions both domestically and internationally. She has not clashed with EU officials and has been a strong supporter of Ukraine following Russia’s invasion, despite some of her cabinet members having close ties to the Kremlin.

However, Federico Santi, a senior analyst at consultancy Eurasia Group, believes that her backtracking on the windfall tax was a significant misstep. He emphasizes that Meloni’s government consists mainly of right-wing populist parties known for erratic economic policy-making. Nonetheless, Santi expects Meloni to stay committed to the core aspects of government policy.

Erik Jones, a professor at the European University Institute, disagrees with the notion that Meloni’s government is more populist than the previous one. He argues that Meloni and her finance minister, Giancarlo Giorgetti, are making efforts to spend without incurring massive deficits.

Italy’s government debt-to-GDP ratio was 144.4% in 2022, and it is projected to decrease to 140.5% this year and 138.8% in 2024. The Italian economy is expected to grow by 1.1% this year and 0.9% in 2024, a decline from the 3.7% GDP growth in 2022, according to the International Monetary Fund.

Analysts suggest keeping a close eye on two events that may impact international investors:

1. The upcoming budget is likely to cause turmoil and controversy, potentially leading to volatility. However, the basic policy is not expected to change, and the government is unlikely to collapse.

2. Delays in receiving certain EU funds could pose a significant risk. These funds, agreed upon during the Covid-19 pandemic, are crucial for public investment and growth until 2026. Italy is the largest beneficiary of the 750 billion euro program due to the severe impact of the pandemic on its economy. However, disbursements are contingent on nations implementing specific measures and reforms. The substantial amount of funds could have a critical impact on Italy’s economy.