Robert Harneis –TDO- (FRANCE)- The Italian government has refused to revise its budget despite its historic rejection by the European Commission. The Commission is now faced with either doing nothing or starting an Excessive Deficit Procedure, which could, after a year or two, result in Italy being fined .02% of its GDP. Bearing in mind that would only increase the deficit, the subject of dispute, it would seem pointless. There is also the sobering prospect of the rapidly approaching European elections in May 2019. The EU is already widely unpopular in Italy as a result of 10 years of economic stagnation and very high unemployment, which is widely blamed on membership of the Euro. At the same time the Italian electorate is now well aware that Germany, that largely inspired the rules that Italy is accused of breaking, has greatly benefited from the Euro. The Commission’s worst nightmare is a substantial number of new deputies arriving in the European parliament just as the quarrel with Italy reaches its peak next year. On the other hand, the Italian coalition, between the League on the right and the anti-establishment 5 Star movement, is showing 60% support in the opinion polls. A final complication for the Commission is that Italy is a net contributor to the European Union budget of 2 billion Euros. This added to the huge debts of 500 billion euros that Italy owes via the Target2 system means that the Commission can huff and puff as much as it likes but the Italian government, unlike Greece, holds very strong cards in any stand-off. The sheer size of the Italian economy means that any financial crisis in Italy would threaten the Eurozone and perhaps the whole European Union. The Commission’s argument that previous Italian governments have committed Italy to following the rules ring hollow as the governments in question were all under the thumb of Brussels, unlike the present Conte coalition.

In these circumstances Brussels may simply let the money markets do their work for them and allow rising interest rates to discipline the rebellious Italian government. The Finance Minister Giovanni Tria has already said that if the spread between Italian and German rates rises to 4% then they will modify their plans. They are currently at 3%. Recent remarks by the German Finance Minister, Olaf Scholz, that there were some aspects of Italian spending plans that anyone could understand, indicate that this is the direction in which the Commission may be going.

Speaking at the SZ Wirtschaftsgipfel Economic Summit in Berlin, Scholz said a complete lack of support for long-term unemployed in Italy was ‘a bit astonishing’ and a change of policy in that area could be considered.

‘If they, the Italian government, is working on questions like this, we can understand this,’ said Scholz.

The minister cautioned however that in doing this, Italy would also be expected to be very cautious with its budget.

‘If you have a very high amount of sovereign debt it is absolutely necessary that you are cautious and this is what the Italian government will have to be,’ he said.

Perhaps the worst thing that could happen for the Commission would be for Rome’s expansionist policies to work and improve the overall position of the Italian economy by bringing some growth with reduced unemployment at long last. Were that to happen the economic policies of the Commission would be seriously discredited and other southern European countries would inevitably insist on doing the same. Either way, the prospects for the Eurozone surviving very much longer as at present constituted do not look good.

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