Budget clash between Italy and EU continues

Italy’s budget proposals are continuing to cause clashes between the Italian government and the European Commission. This has resulted in Italian bonds seeing their worst day since May, falling by 4% last week. The euro currency has also fallen in value to below $1.16 for the first time in weeks. Markets across Europe have also been affected, as the EU urges Italy to rein in their national debt by cutting their budget deficit.

The fall out began when Italy’s populist coalition government, which is made up of the Northern League and the Five Star Movement, announced their 2019 budget deficit of 2.4% of GDP for the next three years. The target of the previous administration was just 0.8%. However, both parties are renowned for their strong views on anti-austerity measures, including wanting to spend more on infrastructure and welfare.

Out of the new 2019 budget, the government has proposed to set aside 10 billion euros for its flagship policy, “citizens income”. This would mean up to 780 euros a month for 6.5 million low earners across the country. In addition to this, the government has also pledged earlier retirement, which it says will create 400,000 more jobs for young people and will cost around 7 billion euros. The remaining budget allowance would be spent on avoiding VAT increases, which would cost around 12.4 billion euros.

But, Italy’s national debt is already at 130% of GDP, which is the second highest in Europe after Greece. The EU Economic Commissioner Pierre Moscovici says “We have no interest in a crisis between the Commission and Italy, it is in nobody’s interest because Italy is an important euro zone country. But we don’t have any interest in Italy not respecting the rules and not reducing its debt, which remains explosive.”

He added that the Commission had “no interest in a crisis”, and that Italy is “not respecting the rules” by refusing to control its debt. “One euro less on roads, one euro less on education and one euro less on social justice”, he continued. “Spending your way out of economic trouble ends up working against those who do it,” he continued. “And it’s always the people who pay the price in the end.”

The economic minister in Italy, Giovanni Tria also disagrees with the plans. He has frequently voiced his concerns that a budget deficit of over 1.9% would risk the containment of Italy’s debt. He proposed a cap of 1.6%; however, this was rejected by the parties and he has now threatened to resign. The rejection of this proposal could also lead to further action being taken by Brussel

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