News analysis: Italy refuses to back down to EC budget demands. What happens next?

Source: Xinhua| 2018-11-15 06:35:33|Editor: Mu Xuequan
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By Eric J. Lyman

ROME, Nov. 14 (Xinhua) -- Financial markets reacted negatively to the start of an unprecedented new chapter in the budget standoff between Italy and the European Commission, before the end of Wednesday's trading.

Late Tuesday, just before the commission's 15-day deadline for Italy to refile its 2019 draft budget plan with a reduced deficit, the Italian Ministry of Finance released a budget plan almost identical to the one that sparked the warning from European officials.

Italy announced a month ago that it wanted its 2019 budget to include a deficit equivalent to 2.4 percent of the country's gross domestic product, three times larger than guidance from the commission, the European Union's executive wing. On Oct. 22, commissioners gave Italy 15 days -- until Nov. 13 -- to resubmit a budget with a smaller deficit. Italy declined.

"We still have the conviction that this is the budget needed to get the economy going," Luigi Di Maio, Italy's deputy prime minister said late Tuesday.

"For 15 days the budget plan was discussed with ministers, multilateral organizations, the Court of Audits, economists, and officials from the National Statistics Institute," Francesco Daveri, a macroeconomist with the SDA Bocconi School of Management in Milan, told Xinhua. "The result was the government came to the same conclusion as before: the budget deficit should be 2.4 percent" of gross domestic product.

Daveri said that the Italian government's failure to gain the commission's OK for the budget would likely trigger sanctions, which could add up to as much as 0.2 percent of gross domestic product. That could total around 4.4 billion euros (4.9 billion U.S. dollars) based on this year's estimates of the size of the Italian economy.

Political scientists have told Xinhua that standing up to the European Commission would likely earn political points for the backers of the two political parties supporting the government of Prime Minister Giuseppe Conte. But sanctions would further drain the economic resources of the cash-strapped government while hurting the country's prestige internationally.

"It is very unlikely that full, maximum sanctions will be levied," Daveri said. "But this is unchartered territory. No European state has gone this far without making an attempt to follow the commission's guidance. Any sanctions would be significant."

When markets opened Wednesday, they reacted negatively to the news. The yield on Italy's benchmark ten-year bonds immediately leapt to 3.6 percent, their highest level since 2014. They calmed by the end of the day, ending at 3.493 percent, bit that is still their highest close in 46 months.

The Italian Stock Exchange in Milan reacted similarly, the blue chip MIB-30 index opened nearly 2 percent lower than its close on Tuesday before briefly climbing back into positive territory and ending 0.73 percent lower on the day.

Among the biggest losers in the MIB-30 were companies that had once been state-run monopolies, such as communications giant Telecom Italia, which finished the day down 3.4 percent, and the Italian Post, which lost 2.8 percent Wednesday.

That trend was due in part to the Tuesday announcement that the government could try to pay down the deficit by selling off its minority shares in former state companies. The shares lost value due to the prospect that a government selloff would upset the balance between supply and demand.

"The problem with selling off shares to reduce the deficit is that the value of those shares is dependent on market forces," Giuseppe De Arcangelis, an economist with Rome's La Sapienza University, told Xinhua. "One of the market forces that could push prices lower is the very fact that the government want to sell its shares."