Italy makes concessions to EU as capital flight increases, but tensions may resume

Source:Global Times Published: 2018/12/17 19:23:39

Spooked by hostile markets, Rome's anti-austerity government is offering to trim its 2019 budget deficit goal by 0.4 percent of GDP. The U-turn may help Italy escape damaging EU fines. Investors will be pleased, but the government may just be saving its battle for another day.

When Brussels rejected in October Italy's bloated budget plans, Deputy Prime Minister Matteo Salvini said the executive "would not to back down by a millimeter." That pledge was forgotten on Wednesday when Prime Minister Giuseppe Conte promised European Commission President Jean-Claude Juncker to lower the deficit target to 2.04 percent, a climbdown from the initial 2.4 percent goal, equivalent to 6 billion euros ($6.8 billion) of savings.

The retreat is a sign of the EU-sceptic coalition government's need to regain investor confidence. Concerns that public debt would continue to climb and the EU row have triggered massive outflows from Italian stocks and bonds and pushed government debt yields to multi-year peaks. Local entrepreneurs' anger and the 5 billion euros of extra interest on public debt next year alone may have worn out Italy's radical leaders.

Italy's concessions are now within sight of EU demands. Brussels wants Italy to cut its structural deficit by 0.6 percent of GDP, equivalent to a 1.7 percent headline deficit number. But it was probably willing to accept 1.9 percent to allow for some emergency spending. With the gap now roughly 0.1 percent of GDP, the clash seems defused, particularly after French President Emmanuel Macron promised 10 billion euros of welfare spending to quell riots at home.

The peace may not last. For one, Italy's move could just be a delaying tactic. The Juncker Commission will be gone after May European parliament elections, which may see a rise of anti-EU parties. And, despite the lower deficit, the government doesn't appear to have fundamentally changed its fiscal approach. Some of the savings may simply come from delaying the start date of a flagship citizen's income plan, and an early retirement scheme, together worth about 16 billion euros. But the growth-boosting potential of such measures is questionable. If Italian growth fails to pick up, tension with Brussels and markets will inevitably resurface.

The author is Lisa Jucca, a Reuters Breakingviews columnist. The article was first published on Reuters Breakingviews.

Posted in: INSIDER'S EYE

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