On November 7, the European Commission predicted that Italy's economic growth will be slower than the government's expectations in the next two years, resulting in a government budget deficit that will be much higher than expected, and public debt will remain stable rather than decline. Eurozone officials worry that under certain circumstances, investors may lose confidence in Italy's ability to repay debt, triggering a disaster similar to the 2010 Greek sovereign debt crisis.
The EU believes that Italy's economic growth in the next few years will be less than expected
These predictions highlight the European Commission's view that the Italian budget draft in 2019 is a flagrant violation of the EU's fiscal rules. This view was supported by all euro zone finance ministers last week. The EU's fiscal rules require annual deficit reductions and debt.
The European Commission's forecast may provide arguments for EU enforcement agencies to take disciplinary measures against Italy later this month, unless Italy submits a draft revised budget that meets EU regulations by November 13.
Italy has repeatedly stated that it will not change the objectives of the draft budget, which has led to unprecedented conflicts with other countries in the euro zone. The Italian populist government won the election for its commitment to increase spending and tax cuts.
The European Commission said in a routine economic forecast for the 28 member states of the European Union that Italy this yearGDPIt will grow by 1.1%, which is lower than the 1.2% expected value given by Italy in the draft budget.
The European Commission also said that by 2019, Italy's GDP will grow by 1.2%, instead of the expected 1.5%. By 2020, Italy's GDP will grow by 1.3%, instead of the expected 1.6%.
Low growth means that Italy's overall budget deficit will account for 1.9% of GDP this year, higher than Italy's own estimate of 1.8%.
EU Economic Affairs Commissioner Moskovsky said that the European Commission's economic forecast is different from the Italian government's forecast. The Commission's forecast for the Italian economy is based on the Italian 2019 draft budget. In addition, the impact of rising Italian government bond yields on Italian budget spending will be greater than the country's expectations.
Italy's budget gap will further expand GDP
In 2019, Italy's budget gap to GDP ratio will soar to 2.9%, instead of the expected 2.4%, and will rise to 3.1% by 2020, instead of the expected decline of 2.1%. According to EU regulations, the ratio of the overall deficit to GDP should remain below 3%.
Italy's structural deficit (excluding one-off spending and business cycle volatility) will increase from 1.8% this year to 3.0% in 2019, and will further expand to 3.5% in 2020.
According to EU regulations, Italy should reduce the ratio of structural deficit to GDP by 1.2% in 2019, instead of allowing it to continue to grow, and continue to reduce the deficit every year until it reaches a surplus.
The deficit reduction policy will help Italy cut public debt. The European Commission expects Italy's debt to GDP ratio to be 131.1% this year, compared with 131.2% last year. ,
Italian Finance Minister Giovanni Tria has always believed that the extra economic stimulus triggered by the budget deficit will accelerate Italy's economic growth and eventually lead to a decline in Italian debt. Treasury Secretary Tria said that the EU's forecast for the Italian economy is based on a one-sided understanding of the Italian budget, and the EU's expectations are in stark contrast to the Italian government's expectations. He also said that the Italian government has confirmed that it will work to achieve the 2.4% budget deficit target of 2019. The EU's technical mistakes will not affect the dialogue between Italy and the EU.
However, the European Commission's forecast shows that the impact of these policies will be minimal in 2019, because this proportion will only slightly decline to 131.0%, and will return to 131.1% by 2020.
The financial market reacted to Italy's 2019 draft budget, and Italy's borrowing costs rose sharply. Italy's 10-year bond yields rose to an intraday high of 3.404% as the European Commission lowered Italy's growth expectations and expected the deficit to soar. Eurozone officials worry that under certain circumstances, investors may lose confidence in Italy's ability to repay debt, triggering a disaster similar to the 2010 Greek sovereign debt crisis.
The European Commission's forecast shows that unless Italy's policy changes, the ratio of its basic surplus (the budget balance before debt service costs) to GDP in 2019 will fall from 1.7% in 2018 to 1.0%. By 2020, this proportion will further drop to 0.8%, indicating that Italy's solvency is weakening.
Italy is the euro zone's third-largest economy, and its 2019 draft budget has caused it to disagree with the EU, which has already put pressure on the euro. If, as the EU predicts, Italy's economic growth rate will not be as expected in the next few years, and the ratio of debt to GDP is high, it will easily reduce investors' confidence in Italy and become a factor in suppressing the euro.
(Article source: Huitong.com)