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The euro and stock markets fall amid Italy budget fears Italy agrees high public spending reforms in potential clash with EU
(about 9 hours later)
The euro and stock markets across Europe fell on Thursday over fears that Italy’s populist coalition government could delay the presentation of its budget targets for 2019 because of an internal standoff. The Italian government agreed to a 2019 budget deficit target at 2.4% of GDP on Thursday night in a move that was celebrated by leaders but could bring the heavily indebted country into conflict with the European Union.
For weeks, the government’s two deputy prime ministers – Luigi Di Maio, the leader of the anti-establishment Five Star Movement (M5S), and Matteo Salvini, who heads the far-right League – have been engaged in a bitter battle with Giovanni Tria, the economy minister. The economy minister Giovanni Tria succumbed to pressure from the government’s two deputy prime ministers – Luigi Di Maio, the leader of the anti-establishment Five Star Movement (M5S), and Matteo Salvini, who heads up the far-right League – to increase the target in order to pay for election campaign promises such as a universal basic income, flat tax and pension reforms.
Tria is trying to resist pressure to put together a budget that will result in Italy’s deficit rising in order to pay for election campaign promises such as a basic income, flat tax and pension reforms. Tria, an academic who is not affiliated to either party, had been seeking a more conservative 1.9% in order to avoid adding to Italy’s debt pile, which currently stands at around 131% of GDP, the second highest in the eurozone after Greece. Speculation that Tria would resign has been denied.
Markets reacted negatively after reports that the ruling parties will push for a 2.4% of GDP deficit target, flouting the more conservative 1.9% that Tria is aiming for. “There is an accord within the whole government for 2.4%, we are satisfied, this is a budget for change,” Di Maio and Salvini said in a joint statement.
Reports of the potential delay pushed Italy’s main stock exchange in Milan down as much as 2% in early trading, with shares in the country’s biggest banks under particular pressure. By 2pm (BST) on Thursday the market was down about 0.9%, or 180 points. Di Maio wrote on Facebook that the agreement marked a historic day and was a victory for Italian citizens, not the government. The means-tested basic income, which will cost €10bn, was a key feature of his party’s election campaign.
The Italian’s government’s borrowing costs also hit a three-week high in the bond markets. “For the first time in the history of this country we will erase poverty thanks to the basic income,” he said. “We will finally give a future to the 6.5 million people, who until now have lived in poverty and been completely ignored.”
The strains weighed on the rest of Europe, too, with stock markets in the UK, Germany and France opening down before recovering to move into positive territory by the afternoon. The euro was down 0.25% in the currency markets, having skidded all the way down to $1.17 (£0.89). He added that the target also contained measures to spur growth. It will now begin its passage through parliament before being presented to the EU by 20 October.
The office of the prime minister, Giuseppe Conte, denied a cabinet meeting to discuss the deficit figure – due to take place on Thursday afternoon - would be delayed. The euro and stock markets across Europe fell earlier on Thursday over fears that an agreement might have been delayed, but then rebounded in anticipation of the government reaching a compromise of around 2%. Italian assets may come under pressure again on Friday.
There is speculation that Tria, an academic not affiliated to either of the ruling parties, could be forced to resign and potentially replaced by Giancarlo Giorgetti, the deputy leader of the League. “The assumption under which capital markets were operating until today, the idea that Tria can rein in the animal spirits of this government, has faded away,” said Francesco Galietti, the founder of Policy Sonar, a Rome-based consultancy.
A League politician Riccardo Molinari said on Thursday that if “Tria is no longer part of the government project, then we’ll find another economy minister.” “The good news is a deal has been done, which is better than endless delay.”
Investors were spooked because they had been expecting the government to reach a compromise on a more cautious target. Italy’s debt pile already stands at around 131% of GDP, the second highest in the eurozone after Greece. Bonds rallied earlier this week on the anticipation that Tria would keep the targets within control. A target of 2.4% was within the 3% EU debt limit, but it could go higher as the budget goes through parliament.
“There was a consensus, or at least one was materialising, that an agreement on deficit was almost there, it would not have exceeded 2% and that journey of the budget through parliament would not have been such a tragedy after all,” said Francesco Galietti, founder of Policy Sonar, a Rome-based consultancy. “As it turns out, there is no consensus at all.” “2.4 is not even the final figure – this is what the government is signing off but during the journey through parliament it could mushroom, so could eventually be 3%,” added Galietti.
Di Maio, in particular, has been stubborn in his insistence that money must be found to pay for a universal basic income – a key promise in the party’s electoral campaign. The 32-year-old has threatened to torpedo the budget in parliament if it does not include this goal. Peter Ceretti, an Italy analyst at the Economist Intelligence Unit, said in a note earlier on Thursday that in the event of a deficit target much larger than 2% “there will be a more significant dust-up with the EU”.
“When you do that, you open a government crisis,” Galietti said. “He’s escalating it to a level that was considered unthinkable for most observers.” However, so long as the target contains growth and reform elements, then things with the EU might go better than forecast.
Some speculate that the M5S sees Tria’s stance as an existential threat to its survival, especially before the European elections in May 2019. “There needs to be some infrastructure spending, as well as an effort to contain tax evasion and simplify laws – I don’t think they [the EU] will narrowly look at the number, they’re more interested in seeing a will to reform,” said Galietti.
By law, the budget must be unveiled by midnight. Failing this, the only other option would to resort to the fiscal goals, including a budget deficit target of 0.8%, outlined by the previous administration’s Economic and Financial Document (DEF) in April. Italy
“The problem [with the DEF] is that the fiscal targets are much more aggressive than what the government wants, so politically it’s not an option but legally it’s the only other option [if the budget gets delayed],” said Wolfango Piccoli, the co-president of Teneo Intelligence, a research firm in London.
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