The risk of an Italian debt crisis is looming for the EU as the nation’s new government pushes a budget that has defied the previous austerity agreements of Brussels.
Italy’s proposed budget seeks a public deficit of 2.4%, far higher than the 1.6% expected by the EU, as the new government seeks to meet the spending promises of its recent election campaign. Italian stocks have moved lower, with the bond markets rising and the risk of a debt contagion is looming yet again for Europe.
European Comission President Jean-Claude Juncker highlighted the risks by comparing the problem to Greece, saying, “…after having really been able to cope with the Greek crisis, we’ll end up in the same crisis in Italy. One such crisis has been enough. If Italy wants further special treatment, that would mean the end of the euro. So you have to be very strict.”
An Italian crisis in the style of Greece likely would be the end of the Euro as the nation’s economy is ten times the size of Greece and the size of any bailout would be astronomical, whilst German Chancellor Angela Merkels recent woes would make it highly that Germany would have the appetie, let alone the ability, to underwrite any extreme measures. With Italian banks still struggling under the weight of non-performing loans, the spike in borrowing costs is threatening an EU-wide contagion once more.
Italy’s 10 year bond yield has risen from around 1% in May of this year and now approaches 3.5%, putting further strain on Italy’s hopes of seeing their budget accepted. The new Italian government has created a hostile stance towards the EU in the past and it remains to be seen whether they will back down in the same manner as Greece’s government, who held a referendum on the bailout deal and then went against the will of the people.
Italy seem headstrong on this budget, with deputy Prime Minister Matteo Salvini declaring: “No one in Brussels can tell me it is not time. If Brussels says I cannot do it, I do not care. I will do it anyway”. With this aggressive tone we can expect further escalation as the EU seeks to deter any efforts to move beyond the will of its project and threaten the single currency.
The EU have attempted to push a strong negotiating hand in the current Brexit stalemate and the Italian issue could force them to back down. If a contagion erupts across the European financial system, it could put the wind in the sails of Britain’s pro-Brexit campaigners and the risk of a “no deal” would rise as the EU tries to put out two big fires- both of which threatens its very existence.