Simon Tilford, (2018), “Italy’s budget challenge to the EU”, esharp.eu, November
What does the political stand-off between Italy and the European Commission over the country’s proposed 2019 budget deficit tell us about the chances of the euro ever challenging the dominance of the US dollar? After all, for many euro advocates, ending the dollar’s ‘exorbitant privilege’ was one of the original objectives of the single currency. And is especially relevant now, given the deepening trans-Atlantic rift over a raft of issues from trade to Iran.
There has been borderline hysteria in some quarters about the proposed deficit of 2.4% of GDP, with talk of how it poses an ‘existential’ threat to the eurozone. There are certainly reasons to object to this budget. There are too many giveaways to groups who do not need or deserve them and not enough investment, for example. But a deficit of this magnitude in an economy that is barely growing is hardly outlandish.
And it needs to be seen in context. Italy has been running among the tightest fiscal policies in the eurozone for many years, contributing to the country’s economic stagnation and low inflation, and in turn, to its high stock of public debt relative to GDP. It is very hard to bring down debt unless an economy is growing and inflation is rising at a decent pace. In short, Italy needs some fiscal stimulus. And providing some should not pose an existential threat to the currency union.
If it does, there is a problem with how the eurozone has been set up as much as with Italy’s public finances. The main reason why Italian borrowing costs have ballooned in recent weeks is because investors fear that the European Central Bank will not be able to stand behind Italian debt, not because investors are concerned per se about Italy breaching the currency union’s fiscal rules. And the rise in borrowing costs risks bringing about precisely the kind of crisis the eurozone wants to avoid by rendering Italy’s debt burden unsustainable, forcing the country into renewed austerity, weakening its economy and worsening its debt dynamics. In short, it risks repeating a pattern familiar from Greece.
Relevant Posts
- Marcus Answorth, (2018), «Italy Gets Starvation Rations From Mario Draghi», Bloomber Opinion, 12 November
- Kirkegaard J., (2018), «Italy-EU Budget Confrontation: Prospects for a Happy Ending», Peterson Institute for International Economics, 5 November