The real enemy lies not with EU budget rules but at home, in the country’s tortoise-like growthby Paul Wallace / October 10, 2018 / Leave a comment
Ever since Italy’s insurgent populist parties forged an unlikely coalition government that started in June, their proposals for the 2019 budget this autumn loomed as a potential flashpoint with Europe. However far apart the right-of-centre League led by Matteo Salvini and the anti-establishment Five Star Movement headed by Luigi Di Maio were in their electoral bases and ideologies, they were united in stuffing their manifestos with costly commitments. That augured ill for the budget given the constraints set by fiscal rules policed by the European Commission.
That flashpoint has duly occurred, causing the yield on Italian sovereign debt to rise sharply as bond prices have fallen (yields are inversely related to prices). That’s a big worry for a country whose debt is stuck at around 130 per cent of GDP, a burden exceeded in the European Union only by Greece. Higher bond yields also hurt Italian banks, which embody the infamous “doom loop” between a shaky state and fragile banks through their big holdings of public debt, and their share prices have suffered.
The tremors in financial markets occurred as the two populist leaders insisted on a looser fiscal stance in 2019 than Giovanni Tria, an outsider university professor appointed as finance minister, had originally intended. Tria had advocated keeping next year’s budget deficit close to 1.6 per cent of GDP, the target it had inherited for this year. Instead this became a defiant 2.4 per cent, considerably higher than the 0.8 per cent envisaged for 2019 by the previous government. T…