Why is Italy’s Budget Proposal so dangerous for the EU?

November 12, 2018

In the phase-out of the financial crisis in 2013 the EU Commission was granted the power to reject eurozone budget plans if they staged a threat to the Euro. Five years later the Commission made use of their power by rebuking the Italian proposal, saying they had no other choice. Now so far so good, a lot of member-states have seen their debts increase in recent years, so why is Italy something else?

 

Italy bears the load of a debt worth 131.2% of their GDP, that is second highest indebted economy after the infamous Greek example which has accompanied us throughout the years. What makes matters worse is that Italy is not only a much larger economy than Greece but also two-thirds of the debt is owned by Italian institutions and individuals who will be the biggest losers in the long-run.

The European Stability Mechanism is equipped to help stabalise EU member states in a crisis. While it invested 250 billion Euros in Greece in the course of three years, Italy’s first year would cost the ESM 277 billion Euros which it cannot handle. This means that Italian taxpayers would be exploited, and EU member states would have to help Italy out of the turmoil. And the damage would be significantly bigger than in Greece, impacting the Euro and the European economy badly.

 

After Italy declined to revise their budget markets reacted mildly, but Reuters reports that senior officials of the Italian government voiced their concerns over potential market turbulences that would be the consequence if the Italian government doesn’t revise their budget plans. Italy’s government however has no intention to do so as any conflict with EU institutions is a political win for them. They were not necessarily elected to increase the debt, but they were elected to object demands from Brussels, and they have not failed to capitalise on this.

 

The EU Commission itself has been fairly quiet since their rejection of the budget, this has political reasons. In May 2019 the European elections will see a change in the political landscape in the European parliament and the European Commission as left-and-right wing political parties will gain ground. In order to evade any controversial debates, which benefits populist governments, EU institutions have kept very quiet. On the other hand, finance ministers of European governments have criticised their Italian counterparts for not playing by the rules and harming Europe as a whole. Criticism came all finance ministers in the Eurogroup – an informal organisation of the 19 countries with the Euro as a currency. Yet Italy knows that in the end it will be all European countries paying for the Italian debt, as it will impact all economies.

 

Concerns have also reached Wall Street. I an interview with the German newspaper “Handelsblatt”, JP Morgan’s Jamie Dimon criticised Italy’s approach to the new budget, saying that while he cannot exactly foresee how bad the impact will be on the markets, he would advise investors to lay out their portfolio more defensively to obviate any sudden market turmoil.

 

The question arises if the Italian government will really continue their spending agenda. There is no doubt that this will benefit government in the short-term as popularity is increasing, however in the long-term this might backfire as taxpayers will be the victims of the debt-policy.

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