Italy Openly Defiant of Eurozone Stability Pact, Deliberately and Knowingly

Eurozone officials and the ECB are in a quandary over Italy's deliberate defiance of budget rules.

There is a fundamental irony in Italy's open defiance of Eurozone stability rules. Both France and Germany did the same in 2003.

Eurointelligence reports Italy Formulates First Fundamental Challenge to Reformed Stability Pact.

It is hard to concoct a more fundamental challenge to the European Commission’s authority than a member state announcing, like Italy did yesterday, that it is going to break the rules deliberately and knowingly. Such purposeful disregard threatens the whole rules-based edifice of the Commission’s authority, and ultimately treaty-based European integration.

In the current face-off between Brussels and Rome over Italy’s budget, a look back at the years 2003-2005 is as amusing as it is instructive. Then it was France and Germany that smashed the stability pact.

France and Germany argued at the time that the breach was temporary and that growth would resume later. Thos are exactly the arguments Italy makes today.

Interested parties may wish to read the November 26, 2003 Telegraph article France and Germany Smash Euro Pact.

The lead paragraph is amusing as are some further down the line.

The eurozone's Stability and Growth Pact was effectively killed off yesterday when EU finance ministers refused to enforce treaty law against France and Germany for persistently breaching the spending rules.

France and Germany won backing for their "flexible" interpretation of the pact after a stormy exchange with smaller states. In the formal show of hands later, only Holland, Austria, Finland and Spain voted to uphold treaty law, although Belgium, Sweden, Denmark and Greece voted for a lesser condemnation.

If you seek further irony, it was Germany that demanded the pact in return for giving up the Deutsche Mark.

France and Spain are in violation today but supposedly they are on the right path. Meanwhile, Italy says to hell with it all just as Germany did in 2003.

Italy's economy minister, Giovanni Tria, says the breach of rules will be temporary and says that it is coming with a whole underreported package of structural reforms that will boost Italy’s growth potential.

That's a lie and everyone know it. Returning to Eurointelligence:

We have not reached the point of a communications breakdown yet. Iin his letter yesterday, and in everything both sides have said, a willingness to continue to talk has been emphasized, and wisely given the political mood in Italy.

Tria has tried to hold out a small olive branch by saying that Italy would correct its budgetary planning should growth fail to live up to his governments’ projections, which are nearly universally seen as wildly over-optimistic. But we see no other way forward for the Commission than to continue to ask Rome to bring its budgetary planning back into line, and to escalate the disciplinary procedures of the stability pact step by step for so long as this does not happen.

In acknowledging Italy's disregard of the rules so openly and echoing the Franco-German rebellion of 2003, Tria has turned the Italian question into the first fundamental challenge to the beefed-up stability pact as it emerged from the latest round of reforms.

Kiss Reforms Goodbye

We note in passing that this sounds like the death knell to any hopes of achieving any meaningful reform of the eurozone this year or next. If a major state is locked into a fundamental conflict with the Commission and its partners, any substantial reform project will be sidelined and pushed off the agenda. With European elections next year, it will be 2020 or even later before a new reform effort has any chance of serious discussion.

Spotlight Italy, Fed, ECB, Iran, Tariffs, Brexit

Eyes are on the US midterms elections. Look elsewhere for the real fireworks.

Politically, Trump will be in a lame-duck position in Congress. What happens with tariffs, Brexit, Italy, and rate hikes will be far more important.

Italy's budget rebellion comes at particularly difficult time for the Eurozone. Germany's exports will collapse if there is no deal, and that is increasingly likely.

Even if there is a deal, Germany is in a world of hurt over car emissions. And if Italy is cut to Junk (Moody's is one stop above Junk level), its bonds cannot be used as collateral.

If on top of this, Trump puts a tariff on German cars, kiss Germany goodbye.

I doubt the Eurozone survives this onslaught intact.