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Italy-EU Budget Confrontation: Prospects for a Happy Ending

Kirkegaard J., (2018), “Italy-EU Budget Confrontation: Prospects for a Happy Ending”, Peterson Institute for International Economics, 5 Νοεμβρίου

Perhaps predictably, the new anti-establishment Italian coalition government, which took office in May, is engaged in a confrontation with the European Commission over its expansionary budget. With a significantly larger deficit planned for the coming fiscal year, the budget conflicts with the EU’s fiscal rules and reneges on commitments made by the previous government, a development that has already unsettled financial markets.

By inviting this confrontation, the government of Prime Minister Giuseppe Conte has boosted its popularity domestically. But the European Commission has significant leverage in the form of laws and macroeconomic and political circumstances to prevail in this fight. It has, for example, a crucial ally in the European Central Bank (ECB), which can inflict pain on core political constituents of Conte’s coalition. As pointed out by my colleagues Alvaro Leandro and Jérémie Cohen-Setton, a fiscal showdown with Italy involving sanctions worth billions of euros could come as early as March 2019.

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