Moderation is waning in Italy-EU conflict

Subject

Italy's budget conflict.

Significance

June 5 marked a resumption in hostilities between Italy and the EU, after the European Commission sent a letter to Rome saying its spending plans were breaking EU fiscal rules. The Commission will now begin the process of implementing an excessive deficit procedure (EDP) against Italy aimed at reducing its deficit and debt. This will likely involve deficit reduction measures that could precipitate the collapse of the populist government.

Impacts

• If an EDP is blocked, efforts to launch it will start again in September if Italy’s budget preview shows Rome not complying with EU rules.
• An EDP could lead to higher borrowing costs and make it more difficult for Rome to reduce its excessive debt, which is around 132% of GDP.
• A League-led right-wing government would push for aggressive tax cuts, potentially leaving Italy in the same predicament that it faces now.
• The implementation of a parallel currency to boost the supply of money would fuel concerns that Italy is prepared to leave the euro-area.