The deadline for the Italian government to submit a revised budget to the EU Commission is Tuesday.
Italy has said it will not change its deficit spending plans setting up a potential test of the Commission’s never used enforcement mechanism.
Giovanni Tria, the Italian Finance Minister has offered to lower the government’s estimate for 2019 economic growth to 1% from 1.5%, according to Italian media reports, but would leave the proposal for deficit spending at 2.4% of GDP.
Because the government spending plans for 2019 are set this year, basing the deficit on a percentage of next year’s GDP means the size of the deficit depends on the estimated growth rate of the economy. If the government is correct and the economy grows at 1%, the deficit would be 2.4% of GDP. But if the economic expansion is slower, the already set deficit amount would be a larger percentage of GDP, if the growth is faster it would be smaller.
The Italians have promoted the latter scenario saying that the deficit spending and consumption is necessary to lift the economy from stagnation and that faster growth will reduce the deficit percentage. The Commission has complained that Italian growth targets are far too optimistic, and predicted their own estimate of 1.2% GDP growth in 2019 would produce a deficit percent of 2.9%.
Since reducing the growth rate for 2019 lowers the size of the deficit, it also lowers the amount of borrowing Italy would have to obtain from to the credit market.
Officially the EU has a treaty deficit limit of 3% of GDP but that limit has been breached by several EU countries notably multiple times by France. The previous Prime Minister Matteo Renzi had agreed to reduce Italy's deficit to 0.8% of GDP.
If the EU Commission finds these actions by Italy insufficient the first enforcement step could be a request that Italy remit a deposit of 0.2% of GDP ($4.4 billion, $2.2 trillion economy PPP) to the European Stability Mechanism, the EU’s financial rescue fund. It could also set a deadline for early next year for Italy to begin to reduce its debt, which at 130% of GDP is second only to Greece in the EU, though Eurozone governments would have to approve such a measure.
Missing that deadline could turn the deposit into a fine and suspend billions in EU funds that are spent in Italy and impose monitoring by the Commission and the European Central Bank of Italian government finances similar to the oversight on Greece imposed after her bailouts.
The EU Commission would, or should be extremely reluctant to take these actions. Italy is the third largest economy in the EU and one of its original members. The Italian economy has lagged behind the EU in growth for most of the past ten years and the current government was elected largely on its economic promises.
The government of Prime Minister Matteo Renzi was roundly defeated in the March election, coming in third behind The League and 5 Star, the government coalition’s partners. The EU demand that Rome kowtow to its deficit wishes pits Brussels against the Italian electorate. That is a position that should terrify any sensible bureaucrat
Reuters
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
EUR/USD stays near 1.0800 after upbeat US data
EUR/USD stays under modest bearish pressure and trades near 1.0800 in the American session on Thursday. The data from the US showed that the real GDP growth for the fourth quarter got revised higher to 3.4% from 3.2%, supporting the USD and weighing on the pair.
GBP/USD stays in daily range above 1.2600
GBP/USD fluctuates in a narrow channel above 1.2600 on Thursday. The better-than-expected Initial Jobless Claims data from the US and the upward revision to the Q4 GDP growth helps the USD stay resilient against its rivals and limits the pair's upside.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays above 4.2% after upbeat US data and makes it difficult for XAU/USD to preserve its bullish momentum.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.