How Italy Leaves the Eurozone, Step by Step
The EU demands Italy do something about its buildup of debt. In response, Italy dismisses 'implausible' EU forecasts, says budget is sound.
> “There are no grounds for questioning the soundness and the sustainability of our reforms,” Prime Minister Giuseppe Conte said in a statement. “For this reason we consider any other type of scenario for Italy’s public accounts to be absolutely implausible.”
> If Italy does not budge, the Commission could launch an “excessive deficit procedure” that could eventually result in fines, though these have never been levied on any country in the monetary union.
> “The European Commission’s forecasts for the Italian deficit are in sharp contrast to those of the Italian government and derive from an inaccurate and incomplete analysis (of the budget),” said Economy Minister Giovanni Tria.
> “We regret to note this technical slip on the part of the Commission, which will not influence the continuation of constructive dialogue with (it).”
Excessive Deficit Procedures Coming Up
Mercy, that sounds ominous, but I cannot any concrete example of the EU ever doing anything.
Reuters has a Factbox List of Key Dates, five of which have already passed with no consequences. Here are the remaining steps to laugh at.
- Nov. 19: In the event its budget were rejected by the Commission, the Italian government would have three weeks from the date of the EU opinion to submit a revised budget.
- Dec. 3: Monthly Eurogroup meeting.
- Dec. 10: The Commission would have three weeks, likely until Dec. 10, from the submission of Italy’s amended budget to adopt a new opinion in which it would describe Italy’s overall budgetary position and its impact on the whole euro zone.
- Dec. 13: The European Central Bank’s Governing Council holds a monetary policy meeting that is set to wrap up its bond purchase program, a widely expected move that could, however, further increase Italy’s spiraling debt servicing costs.
- Dec. 14: EU leaders at their regular end-of-year summit would likely discuss Italy’s budgetary plans if no solution was found at this stage, further increasing market and peer pressure on Rome.
- Feb. 4-7: This is the week when the Commission is expected to publish its economic forecasts up to 2020, which would show whether EU calculations match Italy’s growth, debt and deficit projections which underpin budget targets. The data could pave the way to sanction procedures if EU and Italian data differed widely.
Huffing and Puffing
That is a lot of huffing and puffing signifying nothing. Then what?
Then, under EU rules the Commission can send an “early warning” letter anytime to states that show a significant deviation from their targets.
Then, If Italy refused to change its draft budget, the Commission could open an excessive deficit procedure against Rome, which would likely push Italy again into the market spotlight, and could also trigger fines.
Reuters notes "Sanctions procedures are usually started by the Commission when final data are available over a two-year period, which would mean that this decision would come in April 2019, just few weeks before the May’s European Parliament elections."
It's not just Italy. The European Commission sent a warning on November 22, 2017 to Italy, France, and Romania over their budget plans for 2018.
A whole year has gone by.
EU rules says that member states' debt should not exceed 60 percent of their GDP.
Hmm. It seems like Italy has been ignoring EU rules for something like forever.
Who hasn't? Good Question. The EC has this overview of Excessive Deficit Procedures.
26 of 28 Countries Triggered Excessive Deficit Procedures
Congratulations to Estonia and Sweden.
Meanwhile, please note that Spain has been in a state of continual excessive deficits since 2009, with no fines for continually missing targets.
Fine Coming Up?
The EU has never fined any country. Nonetheless expect the EU to threaten Italy with fines.
Walking Out of the Eurozone
Italy’s deputy prime minister Luigi Di Maio on Thursday reiterated his country had no plans to leave the single currency, but it would not change its 2019 budget deficit target despite its rejection by the European Commission.
Since the election, Italy has not threatened to hold a referendum. But a referendum and parallel currencies were part of the platform of some members of the coalition heading into the election.
Via open belligerence as opposed to making promises purposely never kept as Spain did, Italy is openly inviting the EU to tighten the screws, with fines, for the first time.
Also expect the ECB to rule it cannot hold Italian debt if the rating agencies downgrade Italy to Junk.
Should the ECB and EU act, Italians will blame those organizations, not the Italian government.
Meanwhile, resentment against the EU builds.
This setup is precisely how Italy leaves the Eurozone by default.
Mike "Mish" Shedlock