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Wednesday, November 7, 2018

Italian budget, towards a strengthening of the European Stability Mechanism?

Economy - Finances, -,

 On Monday, ministers of the eurozone asked Italy to change its 2019 draft budget as well as to respect the European Union's budgetary rules. This situation represents a challenge for Italy that risks an excessive deficit procedure because of its excessive debt. But above all, it is a challenge for European countries. Indeed, as the third largest economy in the eurozone, the question ...

A European challenge

First of all, the Italian situation calls into question the project to integrate European economies. This included the creation of a common bank deposit guarantee scheme, a euro-area budget, common rules for debt restructuring and a strengthening of the region's banking re... Read more

 On Monday, ministers of the eurozone asked Italy to change its 2019 draft budget as well as to respect the European Union's budgetary rules. This situation represents a challenge for Italy that risks an excessive deficit procedure because of its excessive debt. But above all, it is a challenge for European countries. Indeed, as the third largest economy in the eurozone, the question of the Italian budget calls into question the common currency of the nineteen countries, their plans for further economic integration and the European stability mechanism.



A European challenge

First of all, the Italian situation calls into question the project to integrate European economies. This included the creation of a common bank deposit guarantee scheme, a euro-area budget, common rules for debt restructuring and a strengthening of the region's banking resolution fund. The conflict between Rome and Brussels challenges this integration.

Italy's poor economic health also pushes the EU to think upon its support mechanisms, including the European Stability Mechanism (ESM) used in Greece in 2012. The use of the "European IMF" to provide assistance to euro area countries affected or threatened by financial difficulties had led to a worsening of the euro area's economic situation due to the very strict conditions for access to assistance and the reforms imposed on it. Thus, several countries want this tool to be reformed.

Finally, the overrun of the deficit and debt rule, which stipulates that the budget deficit must not exceed 3% of gross domestic product (GDP) and that public debt (debt of the State and public agencies) must not exceed 60% of GDP by Italy, leads the EU to question its lack of rigour and equity compared to other European countries: “If we accepted the (deficit) overshoot … some countries would cover us with insults and abuse, accusing us of being too flexible with Italy,”, Jean-Claude Juncker said.

Two opposing economic views

While Brussels advocates a reduction in debt and deficit, Italy has presented a plan that would increase its budget deficit to 2.4% of GDP from the previous government's target of 0.8%. These are two opposing views of the economy: for Brussels, debt is seen as "the enemy of the economy" as Pierre Moscovici stated. For his part, the Italian Prime Minister, Guiseppe Conte, adopts a rather Keynesian stance: on the 16th of October, he stated before the Italian Parliament that these additional expenses were necessary to stimulate investment in the country. "We are convinced that the path of austerity policy is a dead end. »

Towards a strengthening and hardening of the MES?

On November 1st, Denmark, Estonia, Finland, Ireland, Latvia, Lithuania, Sweden and the Netherlands published a document in favour of strengthening the European Stability Mechanism (ESM). In this document, the group stated that it was committed to ensuring that the ESM was "adequately equipped to meet all future challenges". The group behind the slingshot is also in favour of tightening up access to the 500 billion euro fund. In their view, the ESM should only intervene "in cases of extreme necessity, only if the European financial stability of all Member States depends on it".

But there are disadvantages to introducing stricter conditions. First, it may frighten countries eligible for an early rescue plan, compounded by the difficulty of accessing preventive financing without being "stigmatised" in the eyes of investors. However, the sooner the economy is helped, the less likely the crisis will spread. On the other hand, conditioning ESM aid has not proved its worth and, in the case of Greece, has even proved counterproductive, driving the country into a vicious circle of recession and insolvency. 

 

While Italy has until  November 13th to send a revised draft budget for 2019 to Brussels, the leaders of the coalition of the League (far right) and the 5 Star Movement (M5S, "anti-system") have repeatedly excluded making concessions. Disagreements between the European Union and the Member States continue widening. 



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