Italian bond yields rise as deadline on budget plan looms

Blanche Robertson
November 14, 2018

At issue is the 2019 budget plan put forth by Italy's populist coalition, which comprises M5S and the nationalist Lega party.

Although Italy did make minor adjustments, the revisions are not likely to persuade the Commission, putting Italy in a high-stakes standoff with Brussels that could result in financial sanctions.

Rome will continue its fight against the European Commission after Brussels' powerful executive sent the populist government's draft budget plans back for reconsideration because they go against EU fiscal rules. A report showing Italy is in breach of the European Union debt rules would be another step down the path toward potential financial penalties.

Vladis Dombrovskis, the EU Commissioner responsible for financial affairs, said: "From previous experiences, we've seen that damage to the economy can be done quickly, but then it takes years to fix".

A demonstration has been called for the 8 December by Matteo Salvini to say "peacefully" to the "gentlemen of Brussels: let us work, live, and breathe".

Luis de Guindos, deputy head of the European Central Bank, said if the dispute turns sour, then Italian stocks and bonds could suffer and risks creating a contagion to other Eurozone economies. The number of Italians in absolute poverty has tripled in 10 years.

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The measures are to be paid for by deficit spending equal to 2.4 percent of gross domestic product (GDP), which according to a version of the budget published by Finance Minister Giovanni Tria last month "is expected to grow by 1.5 percent in 2019, 1.6 in 2020 and 1.4 in 2021".

That view is shared by many economists, who warn Italy's coalition government is being overly optimistic.

The commission predicted Italy's budget would push its deficit to 2.9 per cent of GDP in 2019, rather than the 2.4 per cent estimated by Rome, and that it would rise to 3.1 per cent in 2020 against Italy's 2.1 per cent estimation - above the bloc's limit. However, given that the Italian government is mostly populist, it will find it hard to pursue such important changes in budget.

Italy's rightwing populist government argues its planned budget will stoke the country's stagnant economy through a mix of generous welfare spending, tax cuts, and investments.

The Fund wants budget reforms that are inclusive but also support the goal of reducing Italy's national debt, which at 130 per cent of national output is the second highest in the euro area after Greece. In the currency bloc, the recommended level is 60% of GDP.

Despite pressure from the European Commission, which rejected Rome's budget outright last month in a first for the EU, Italian Deputy Prime Minister Luigi Di Maio vowed to stand firm on the country's anti-austerity plans.

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