Because of its defiant attitude and refusal bo play by the European Union’s fiscal rules, the current Italian government often draws comparison with 2015 Greece, when the left-wing Syriza government pledged, during a similar showdown, to resist “diktats” from Brussels.
But some economists and policy makers note that a better analogy for now would be the UK’s Brexiteers.
“Same shrugging off of economic realities, same contempt for ‘experts’, same hope that politics will solve everything, and same delusion about the way the EU works,” noted a senior European government official who met with Italian policy makers in recent weeks.
The new Italian crisis is entering a predictable confrontation phase this week with the formal presentation of the country’s budget to European authorities. The announced fiscal deficit, at 2.4% of gross domestic product, is three times as large as the target a previous Italian government had agreed on. It casts doubt on the country’s capacity, or even willingness, to pay down its public debt, now at more than 130% of GDP, second in Europe only to Greece’s.
Within a couple of days, the European Commission will send Italy a letter asking for some explanations about the budget. Then, European Commissioner Pierre Moscovici will travel to Rome for talks with Italian officials that are expected to produce nothing, and won’t be helped by the fact that Moscovici talked a month ago about the “little Mussolinis” that put Europe at risk.
After this will come Europe’s (and Italy’s) never-before moment: If the Italian government doesn’t want to budge, Brussels will reject its budget, coupled with the requirement to come up with another one.
At each stage, markets will fret. But at each stage, noted a European banker who refused to be identified because he does business with the Italian government, “[Rome] can stand down.” This is after all, he added, is “a crisis that can be unwound and disappear at every crucial moment.”
As long as the crisis is seen as easily reversible, the different stages of the Rome vs Brussels confrontation don’t carry major political or economic consequences. Even yields on Italian bonds which rose sharply — they’re now at around 3.6% on the 10-year maturity, against 2% a year ago — can come down if the Italian government shows it is open to compromise, the European official noted.
But some who have met or talked with Italian officials in recent weeks are less sanguine.
They see an Italian government waiting for the European Parliament elections, due next May, as the key moment of overhaul if not outright revolution in European institutions. “They couldn’t care less about Moscovici or the current [European] Commission, they’re in a waiting game until they get what they hope will be a friendlier Parliament and a friendlier Commission in the Fall of 2019,” says the banker who made the trip to Rome.
Eurosceptics and populist parties across Europe are expected to have a significant presence in the next European Parliament, where they can expect between up to 200 members or more in the 705-strong body, according to some estimates.
Luigi di Maio, Italy’s vice prime minister and the leader of the 5 Star Movement, was explicit in a speech to a farmers’ trade organization earlier this month. “This Europe will be dead in six months. There will be an earthquake at the Parliamentary election,” he said.
“They want to go to the election as the first Italian government who successfully confronted Brussels,” noted Italian scholar Silvia Merler, an affiliate fellow at Bruegel, the European think tank.
And because the Italian government intends to “milk this crisis down to the last voter,” as summed up by a French government adviser, who requested anonymity, the European Commission is trying to deflect the fight. At least as much as it can.
“We know that rejecting their budget will play into their hands,” said the Commission official, but, he added, “what else can we do?”
The initial calculation of Italy’s two ruling parties by presenting a loose budget seemed to be that markets might welcome it because a higher fiscal deficit would be expected go boost growth. By sending yields higher, investors quickly shattered these hopes.
Now Italy is at risk of being punished further by credit-rating firms, which will update their outlook on the country at the end of the month. That would trigger another market scare, since the possible loss of investment-grade status would then force many big investors to ditch Italian government bonds.
When it put Italy’s debt under review back in May, Moody’s, for one, warned that Italy could only avoid a downgrade if it showed its debt is “put onto a sustained downward trend” and if “an ambitious programme of structural reforms were to be implemented by the new government.”
Neither of which the government seems intent to do at the moment.
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