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Brussels eases tensions over Italy’s debt

25 Jun 19

Brussels has thrown Italy a lifeline in their protracted dispute over the country’s massive public debt.

Italian government debt rallied on capital markets after it was revealed that the European Union would pause efforts to crack down on Rome’s deteriorating public finances.

The delay reduces tensions that have generated anxiety among investors about a public debt soaring to 132% of GDP – more than double the EU ceiling of 60%. 

Italy’s €2.5trn debt is proportionally the second-highest in the eurozone after Greece and its structural deficit has risen every year since 2015. 

Its deficit is forecast to reach 2.4% this year and 3.6% in 2020, yet under EU rules should decrease by 0.6% of GDP each year until it is in balance.

However, newspaper reports at the weekend suggested Brussels would hold off on launching a disciplinary process against Italy this week, easing tensions and giving the country’s right-wing populist government more time to reach a deal. 

Investors are monitoring Rome’s volatile relationship with Brussels over its tax and spending plans, which responded to generous promises made during the political campaigns that resulted in the election of its populist coalition. 

The European Commission has repeatedly chided Italy over debt levels that breach EU budget rules, and has paved the way to launch a disciplinary process that could eventually result in it being fined. 

However, the process is convoluted and fraught with political risks, with Brussels having until July to trigger its “excessive deficit procedure” and repeatedly showing signs of holding back. 

The disagreement has influenced market sentiment towards Italian government bonds, widening the premium that investors demand to hold the country’s sovereign debt.

Italy has been told by a range of international agencies that it must reform its economy, which tipped into recession at the end of last year and is likely to continue shrinking this year.

In February the IMF said Italy’s failure to implement wide-ranging reforms is leaving the economy “vulnerable”, and in April the OECD said far-reaching reforms are needed to ensure a sustained economic recovery.

  • Gavin O'Toole, expert on Latin America
    Gavin O'Toole

    A freelance journalist. He has written six books about Latin America and taught the politics of the region at Queen Mary, University of London.

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