A "worried" eurozone looks at the Italian budget

A "worried" eurozone looks at the Italian budget

"-"A "worried" eurozone looks at the Italian budget
©
AFP / File
/ Filippo MONTEFORTE

Eurozone finance ministers, meeting in Brussels on Monday, are expected to side with the European Commission in its standoff with Italy's populist coalition, whose budget was rejected two weeks ago.

"Everyone is worried," says a senior EU official, who is wary of the clash between the Commission, the guarantor of the EU's fiscal rules, and the Italian government, determined to defend its 2019 budget, yet totally outside nails.

Euro-zone ministers (the Eurogroup) "will want to encourage dialogue with the Italians," says a diplomatic source. But they will also have "heart to recall their support for the Commission (…) The rules are the rules.

On 23 October, Brussels rejected the Italian draft budget, a first in its history, denouncing "a clear, clear deviation" from European rules.

The Commission criticizes the populist coalition in Rome, formed by the League (far right) and the Five Star Movement (M5S, anti-system) to have a deficit of 2.4% of gross domestic product (GDP) for 2019 , far above what was predicted by the previous center-left government (0.8%).

Italy has until 13 November to provide a revised budget, otherwise it will be exposed to an "excessive deficit procedure", which could lead to financial sanctions. "It will be inevitable" if nothing changes, promises a European source.

"The procedure will be initiated but there will be a dialogue phase," replied Monday in the Financial Times, Luigi Di Maio, the leader of the M5S. "I do not think we will go to financial penalties".

The Deputy Prime Minister is convinced that it is possible to "significantly reduce the public debt with a large budget" and that the "recipe" Italian emulate if it works.

League boss Matteo Salvini, also deputy prime minister, called on his supporters to demonstrate on 8 December in Rome to say "peacefully" to the "Gentlemen of Brussels: let us work, live and breathe". "Never again Italy on his knees," he said.

"Basta!"

The economic and social situation in Italy is worrying with an unemployment rate of 10.1%, well above the euro area average (8.1%), and a stagnation of activity in the third quarter (+ 0.0%), a first for three years, which could have consequences in the battle with Brussels.

The coalition has indeed built its 2019 budget on a very optimistic growth forecast of 1.5%, when the International Monetary Fund (IMF) is counting only 1% and the European Commission – which must submit new forecasts Thursday – on 1.1%.

But if growth is weaker than expected, the deficit may be even greater.

To make matters worse, Rome, which is already bending under a huge debt of 2.300 billion euros (131% of its GDP), saw the rating of its debt degraded by Moody's, while Standard & Poor's downgraded its perspective, from stable to negative.

"The coalition is the test in this showdown," says Sebastien Maillard, director of the Jacques Delors Institute.

"But I think that the electorate of the League will be tempted to say + basta! + Because Italy is isolating itself," he adds, especially "if the spread (the closely guarded gap between the rates ten-year German and Italian loan, ed) becomes worrying ".

The spread is now around 300 basis points, compared to an average of 130 over the first four months of the year.

The governor of the Bank of Italy, Ignazio Visco, has also expressed his concerns about the consequences of the rise in Italian borrowing rates.

The Italian banks, deemed fragile, did however well out during the tests of resistance published Friday by the European Banking Authority, during which the banks of the EU were faced with a pessimistic fictional scenario.

05/11/2018 13:10:57 –
Brussels (AFP) –
© 2018 AFP

Leave a comment

Send a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.