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Red flags over Italy’s refusal to budge on budget
ROME, Nov 15, 2018 (BSS/AFP) – Italy’s populist government on Wednesday
defiantly stuck to its refusal to revise big-spending budget plans for
Brussels despite warnings from financial market investors and the
International Monetary Fund.
“The budgets Brussels has applauded… have not helped Italy. We’re doing
the opposite,” insisted Deputy Prime Minister Matteo Salvini after Rome told
the European Commission it would not give an inch.
The Milan stock exchange closed 0.8 percent lower as the familiar fear
that stress in Italy could spread to other European countries returned to
haunt the markets.
The “spread” — the difference between yields on 10-year Italian
government debt compared with those in Germany — reached 313 basis points
Wednesday, up from 304 at the close on Tuesday.
It has more than doubled since May when negotiations to form the coalition
government in Rome began.
“Investors are right to be worried,” said Maartje Wijffelaars, Rabobank
economist on Italy.
“Given Italy’s high debt level and weak growth potential, it cannot afford
the current expensive budget with limited (long-term) economic gains,” she
said.
“Another reason to be worried is that the deteriorating relationship
between the EC and Rome will likely make other eurozone member states less
willing to help Italy out (financially) if at some point (it is) necessary.
“And at the same time, it makes it less likely that Italy will cave in or
maybe even ask for such support in time, i.e. before the situation spirals
out of control,” she told AFP.
– ‘Poor, weak will suffer’ –
Dutch Finance Minister Wopke Hoekstra said Rome’s refusal to revise the
budget was “not really surprising, but very disappointing”.
“The budget does not respect the agreements we drew up together in Europe.
That worries me a lot. It’s now up to the European Commission to decide the
next steps to take,” he said in a tweet from the ministry.
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Italy intends to run a public deficit of 2.4 percent of gross domestic
product in 2019 — three times the target of the government’s centre-left
predecessor — and one of 2.1 percent in 2020.
Brussels forecasts Italy’s deficit will reach 2.9 percent of GDP in 2019
and hit 3.1 percent in 2020 — breaching the EU’s 3.0 percent limit.
Rome called late Tuesday for the EU to show “flexibility” because Italy
has had to cope with a series of costly natural disasters, including floods
and a deadly bridge collapse in Genoa.
Economy Minister Giovanni Tria told Brussels that, over the next three
years, making good the damage caused would cost the government about 0.2
percent of Gross Domestic Product (GDP).
The coalition government, made up of the far-right League and anti-
establishment Five Star Movement (M5S), insisted the budget will help
kickstart growth in the eurozone’s third largest economy and reduce the
public debt and deficit.
But Rishi Goyal, who was mission chief on the International Monetary
Fund’s recent visit to Italy, warned Wednesday that Rome was asking for
trouble.
“Growth is slowing. Whether or not a recession is coming remains to be
seen, but the risks are increasing,” he said in an interview with the
Repubblica and Corriere della Sera dailies.
Big spending now “means greater vulnerability when a negative shock
happens, such as a recession or global slowdown.
“Italy could be forced to cut its spending or raise taxes precisely when
the economy is weak. That could transform a modest slowdown into a recession
and it would be the poor and weak who would pay the price,” he said.
– Brussels battle ‘will worsen’ –
The European Commission rejected Italy’s 2019 budget outright last month
in a first for the EU.
It warned non-compliance could activate the “excessive deficit procedure”
(EDP), a complicated process that could lead to fines and also possibly
provoke an adverse market reaction.
“If they try to sanction Italy, they’ll be making a mistake,” League head
Salvini told national broadcaster Rai Wednesday.
The next step from the Commission will be a debt report on November 21,
after which it may launch the EDP process.
“The shadows of scepticism and distrust mar every analysis of the M5S and
League’s measures,” said political commentator Massimo Franco.
“And that suggests the conflict between Rome and Europe is destined to get
more bitter and destructive,” he said.
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