Europe: Italy and Brexit to weigh on the region - Westpac

Tim Riddell, Research Analyst at Westpac, suggests that Italy’s -2.4% deficit to GDP projection may not breach the EU’s -3% limit.

Key Quotes

“EU’s concerns (and likely rejection) are over net debt in excess of 130% and that the prior agreement was for a 2019 deficit of -0.8%. Italy’s debt to GDP data is slightly below IMF’s and so their latest GDP, inflation and debt servicing assumptions leave sparse room for error. If rates rise, risks of breaching limits obviously increase and so the outcome of the ratings agency updates are also key. EU-sceptic factions within Italy’s coalition mean that a rejection could spark outright confrontation with EU and weigh on EUR.”

“Dysfunctional Brexit negotiations and the rise in uncertainty for EU as well as UK are likely to weigh on the region. Latest core CPI and slipping ZEW expectations suggest that ECB will persist with its current policy stance. Any EUR/USD rebounds that may occur into US mid-term elections should be capped within the 1.12-1.19 range.”