Standoff Between Italy and European Commission Escalates as Commission Rejects Italian Budget

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Even though observers expected the European Commission to reject Italy’s budget, having the standoff move one step further has, at least for now, has both sides digging in.

Recall that the proposed Italian budget deficit of 2.4% of GDP for next year is within the normal deficit limits of up to 3% of GDP. And in a point not lost on Italian politicians and voters, France and Germany have broken that limit without having the sanctions gods called down on them. However, the budget rules also call for states with high debt to GDP ratios to reduce their debt loads. The budget forecasts prepared by the Italian government show that happening, but Brussels deemed the forecast growth rates to be too high. The ones they used would at best have the debt to GDP ratio stay more or less the same, an outcome the European Commission deems to be unacceptable.

The formal turndown by the European Commission gives Italy three weeks to submit a new, compliant budget. The Italian governments’ defiant posture suggests that either it won’t do anything or will submit a new document that makes only cosmetic changes. From the Financial Times:

The move is the first time Brussels has refused to endorse an EU member state’s draft budget…[Valdis] Dombrovskis [EC vice chairman responsible for the euro] and Pierre Moscovici, economics commissioner, urged Italy to immediately enter intensive negotiations…

But Italian leaders said the government would “not give up” on its plans. “We know that, if we were to surrender, we would quickly return to the pro-bank and pro-austerity ‘experts’,” Luigi Di Maio, deputy prime minister and leader of the Five Star Movement, said on Facebook. “And so we will not give up. We know that we are on the right track. And so we will not stop.”

Matteo Salvini, the other deputy prime minister who leads the far-right League, said Brussels was not “attacking a government, but a people”. 

Rome had said on Monday it would ignore commission demands for a rethink, triggering Tuesday’s formal rejection by Brussels. If Italy still fails to comply it could ultimately face fines under the EU’s excessive deficit rules….

Giovanni Tria, Rome’s technocratic finance minister, has defended the measures as ways to revive a dormant economy, alleviate poverty and eventually start bringing down Italy’s debt levels from 2020.

A post earlier this month from Bruegel described in some detail how the sanctions would work. The EU has two options. One would be for failing to have a budget that converges to Italy’s medium-term objective of 0% deficit This is called “the preventive arm of the Stability and Growth Pact”. Talk about doublespeak. This sanction route would require Italy to pay a deposit:

The European Commission could thus send a warning to Italy. If the Italian government does not react within one month of the date of the adoption of the warning, the Council should, at that point, issue a recommendation urging the country to take the necessary policy measures to fulfil its European commitments. At its limit, in the preventive arm, a Council recommendation which is not respected can lead to an interest-bearing deposit of 0.2% of GDP, unless the Council decides otherwise by a qualified majority (Article 4 of regulation 1173/2011).

However, one element could delay the procedure: the SGP code of conduct stipulates that “the identification of a significant deviation […] should be based on outcomes as opposed to plans”. As a result, the intervention of the European Commission (at least as far as the preventive arm is concerned) could be deferred until the deviations are actually observed next year when the budget is executed.

The other provision the European Commission could invoke is the “corrective arm” of the Stability and Growth Pact. As you might guess, this approach is more punitive. Again from the Bruegel post:

EU countries are required to keep their budget deficit below 3% and their public-debt-to-GDP ratio lower than 60% – or if the debt ratio is above 60%, it should diminish at a sufficient pace. The Six-Pack legislation of 2011 quantified what “sufficient pace” means: the debt ratio should decline by 1/20th of the gap between the actual debt-to-GDP ratio and the 60% threshold, on average over three years. Given that Italy’s debt ratio stands at 131% of GDP, the gap to the 60% threshold is 71 percentage points, so the average annual decline should in theory be 71% divided by 20 – i.e. 3.55% of GDP per year. Therefore, the debt ratio should fall below 120% in the next three years, a criterion that the new projection of the Italian government does not meet.

So, it is not the 2.4% deficit figure that would be put forward as an argument by the European Commission, but an insufficient decline of Italy’s 131% debt-to-GDP ratio.

Let us stop and point out that the idea that Italy could reduce its debt to GDP ratio by 3.55% a year by any other route than successful stimulus of its economy is ludicrous. But the Eurozone believes in austerity. Heres what the Commission could do:

In terms of procedure, the first step would be a report by the Commission on whether to open an EDP against Italy. Three months after the submission of the budget, on the basis of this recommendation, the Council would decide whether an excessive deficit exists and, if so, to open an EDP with recommendations, deadlines and targets. At this stage, Italy would have three to six months to comply with the given recommendations – i.e. to amend its budget – before the Commission assesses if Italy has taken ‘effective action’. At that point, if Italy does not meet the given targets, the Council could decide on the type (and size) of sanctions it wants to impose on the country and assign new targets. If the non-compliance persists, the process would repeat itself.

In terms of possible sanctions, once it would enter the corrective arm of the SGP, Italy could be required (in case of serious non-compliance or if it has already been required to post an interest-bearing deposit under the preventive arm) to make a non-interest-bearing deposit until the deficit has been corrected. The country could also be sanctioned with a fine worth up to 0.5% of GDP (with a fixed component of 0.2% of GDP and a variable component). The Council could also decide to suspend part or all of the commitments or payments linked to European Structural and Investment Funds in Italy (recital 24 of regulation 1303/2013).

You might say, “Well, can’t Italy just refuse to pay?” The answer is no. The Bank of Italy is part of the Eurosystem and is thus not autonomous. Moreover, its senior employees are likely to see their career advancement opportunities as being at the ECB or elsewhere in Brussels. The Bank of Italy performs treasury functions for the Italian government. So the Commission would have the Italian government’s account at the Bank of Italy debited for any stipulated fines and charges.

Having said all of this, the Commission has launched a completely bone-headed course of action (and that’s before the fact that it is also economically backwards). Confronting Italy now has two bad effects. Rising interest rates don’t just increase the borrowing costs of the government. They also increase the funding costs of Italian banks. They’ve been wobbling on the verge of a crisis for over a year. The EU does not have a workable bank resolution regime right now. Banking experts regard the so-called Bank Recovery and Resolution Directive, made effective in early 2016, as a train wreck that will make bank runs more likely. So pushing the Italian banks into more distress when global growth is starting to look like it might falter is not a smart move.

On top of that, roughing up Italy now plays right into the hands of the Brexiteers in the UK. There is a very small, but not impossible chance that the UK will have a second referendum. If that happens, the Leave camp would be sure to wave the Commission pushing around a populist government as a bloody flag during the campaign. Why jeopardize the possibility that the UK will back out of Brexit?

The Commission could still play tough and tell Italy that if it didn’t meet its targets (as in its projected growth was not materializing) it would insist that Italy revise its budget. The government has already offered to do that, but it’s idea of when it would have to change course would probably be later than the Commission would find acceptable. Holding Italy accountable for its deemed-to-be optimistic budget would allow both sides to save face and avoid a standoff now.

The Trokia had a reason it never fessed up to during the 2015 Greece negotiations that the press never seemed to catch onto which made its brutal and economically illiterate behavior make sense in a twisted way. The biggest lender to Greece was the various Eurozone nations. Even if they had gotten over their misguided faith in austerity, they were trapped by bad accounting and budget rules. For them to recognize the losses on Greek debt (which already existed in economic terms) by reducing the principal amount would have required them to recognize the losses in their budgets on a current basis. Not only would that have been a political death sentence, but also would have required them to raise taxes and/or cut spending. By contrast, the fudges they have made provided only for modest debt relief to Greece and has the effect of spreading out the losses over decades. [Update: a commentor said that the losses wouldn’t be counted for EU budgeting purposes, so apologies for that. However, at least some politicians were very leery of taking writedowns on a current basis, since they would have to be reflected in the governments’ accounts.]

With Italy, by contrast, this looks to be a pure power struggle. The EU is already afflicted with too many upstart populist governments (see, for instance, the row with Poland over its attempt to purge judges in violation of EU rules on judicial independence). Italy appears to be getting the better of EU in a range war over migrants arriving by ship. Immigration is a very divisive issue in Europe, and Italy’s confrontational stance looks to have fed a bad impulse in Brussels to show Italy who is boss.

With Germany refusing to abandon its catbird seat of having disproportionate influence over the Eurozone by going to a more federalized spending system so as to reduce economics disparities between members and make national budgets less important, the Eurozone is destined to keep crippling its members economically. And the needed reforms are even less likely to happen with the EU contending with immigration, Trump, and Brexit. It would be better if I were proven wrong, but the Italian standoff is likely to get worse before it gets better.

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    1. Which is worse - bankers or terrorists

      So what does Italy do here if sanctioned? Pass a law declaring net TARGET2 balances void and unpayable?

      1. Adam Eran

        One point not mentioned in comments or the post: MMT’s Warren Mosler is an adviser to the Italian government. His suggestion: Pay government employees with “tax credits.” This sets up an alternative currency for the Italians over which they have sovereign control.

        EU rules forbid member states from issuing their own currency, but MMT says currency actually is valuable because it’s tax credits. To protest the tax credits, the EU would have to acknowledge the correctness of MMT. Ironic, no?

        Economics is supposed to be the dismal science, but I can see Mosler sitting at the back of the room, snickering behind his hand.

        It’s economics humor…

        1. disillusionized

          Which in effect will amount to paying people less.
          No one will accept them at face value (and indeed part of the point fails if they do).

    2. Yves Smith Post author

      I don’t mean to sound like a pedant or as if I am defending the EU’s conduct, but the EU and Eurozone agreements are quite explicit about how states that join give up their sovereignity on budgetary and other matters related to the Euro. This was not a secret. The treaty terms are very explicit on that sovereignity on these issues was on the EU or Eurozone level. Democratically elected governments signed these treaties. And during the 2015 negotiations in Greece, polls showed that a substantial majority wanted to stay in the Eurozone.

      More generally, as Dani Rodrik explained, you cannot have economic integration, democracy, and national sovereignity all at once. You can have at most 2 of those three, or make compromises on how much you want of each. Smaller countries either cannot be autarkies or find it too costly to try, so they wind up having to make tradeoffs on national sovereignity and democracy.

      1. Marc

        True. But what about the rules around trade surpluses. How about France increasing its debt to gdp over the past five years being both above the 3% threshold and the 60% threshold. How about Spain increasing its debt to gdp from under 40% in 2008 to 100% by 2014. There is not debate that they signed up for it. But one can certainly question how selectively they choose to react to various breaches.

        1. Yves Smith Post author

          I said in the post that other countries had been allowed to break the rules. But the SGP reforms at the end of 2011 were supposed to produce more consistent application. And if you look at a table in Wikipedia, he countries with debt to GDP ratios over 60% are having decreasing debt to GDP levels and/or running budget surpluses, in most cases significant ones. The exceptions is Greece.

          Spain was in an IMF program from 2012 to 2014, which means the memorandum negotiated with the IMF would supercede other arrangements. As I am sure you know, the IMF does a good job of keeping a boot on the neck of its borrowers.

      2. Steve

        Finally, someone points out the obvious. Every one of these EU members which decides to join up for the benefits, almost always with overwhelming support of their populations, knows what is required. They simply want the benefits without the restrictions and/or obligations. You’d have thought Greece provided an object lesson.

        1. Summer

          I’ll bet the benefits were promoted as good for everyone and a bumch of uadda-yadda about the “future” and “ideals” and “jobs.”

      3. Summer

        “And during the 2015 negotiations in Greece, polls showed that a substantial majority wanted to stay in the Eurozone.”

        At the point that trying to bring back their own currency, etc would have been more onerous.

        Yeah, I’d keep the stale bread if it was all I had to eat. But my longterm health would still be in danger.

        1. Yves Smith Post author

          The discussion didn’t even make the press. The Greeks liked the idea of being able to work in the EU. Leave the EU and their only job opportunities would be in Greece.

  1. vlade

    Agree that the most sensible EU option now would be wait and see – and sanction on outcomes. The “problem” with that is that it could be seen as soft, encouraging others to follow. This is the problem with idealogical idiocy – base things on (often faulty) assumption rather than outcomes. If the EU is really ruled by technocrats, then this is what they should go for.

    Unfortunately, I think there’s more ideologues in the supposedly technocratic institutions than real technocrats.

  2. MisterMr

    “With Germany refusing to abandon its catbird seat of having disproportionate influence over the Eurozone by going to a more federalized spending system so as to reduce economics disparities between members and make national budgets less important, the Eurozone is destined to keep crippling its members economically.”

    So basically you are proposing to centralize more EU’s government spending, which in turn would create more fiscal transfers between poorer and richer regions of the EU.

    Do I read this correctly?

    While I would agree to this, nobody wants to go in that direction: neither the central/northern wealthier states, that would end up paying more, nor the populist/sovereignist groups, who apparently want less, not more, centralisation (even though they are quite ambiguous guys so who knows).

    Plus, in the case of Italy, Italy is still a net contributor to the EU budget so I don’t think this would be very effective.

    Personally I think the EU should, as a whole, just go into a much more expansive and inflationary policy mode.

    1. Yves Smith Post author

      Please bone up on Modern Monetary Theory. The EU is a monetary sovereign. It does not need to tax to spend. It can and should run deficits until it starts creating inflation. The EU is a long long long way from having an inflation problem.

      1. MisterMr

        Perhaps I didn’t understand what you meant, then.

        I think that the EU actually needs inflation, not that inflation would be a problem.

        Someone’s debt, like Italian government debt, are someone’s else assets (like the assets of Italian savers or of Italian banks).
        Higer inflation reduces the incidence of debt, but also reduce the value of the savings, as the two are actually two faces of the same coin.
        In this situation I think this would be a good thing: there is too much savings and financial wealth going around.

        But obviously most savers wouldn’t be happy whith this. Savers in Italy certainly wouldn’t be happy, and savers in other parts of the EU where the economy isn’t going that bad certainly would hate it.
        That’s IMO the reason central european countries are for austerity.

        1. Mael Colium

          You are mistaking the member states as being sovereign with respect to currency. There is only one sovereign in this regard – the EC. So the balancing of assets against liabilities doesn’t come into play.
          The States within the EU are not currency issuers. Their balance sheets stand alone as they are users of a foreign currency and at risk of default. This is the card the EC are playing.

      2. Synoia

        Before the EU has an inflation problem, they have a German and Dutch problem.

        The Germans and Dutch have control of their surpluses. The EU has control of deficits.

        Based on the history, every other country in the EU would probably behave the same way.

      3. Oregoncharles

        Technical point: don’t the treaties effectively forbid the EU/ECB from functioning as a monetary sovereign? If I understand them correctly, there is no true monetary sovereign in the Eurozone. That was the point – to rule out MMT type policies. That’s precisely why the ECB had to go on a bond-buying binge, and even that was questionable.

        Obviously, that was idiotic, malicious, or both, but it’s been the gist of several articles here. These are chickens coming home to roost, after a diet of dynamite.

        This is the problem Varoufakis was trying to address, so far with no effect whatsoever; I wonder whether he’s delighted or terrified?

        1. Synapsid


          “These are chickens coming home to roost, after a diet of dynamite.”

          Priceless. I shall steal this, and I thank you as one PNW’er to another.

  3. Frenchguy

    Interesting, here are my 2 cents:

    _something that must not be overlooked is that while 2.4% is the official target, the details show that it is an optimistic one: growth is assumed to be high, interest rates are assumed to not move up too much, spending cuts (always hard to do in practice) are pencilled in… I think that, for the Commission, those fudges are almost as worrying as the 2.4%. One of the things that really got the Greek crisis going was their admission that they had faked their accounts.
    _the Commission really does not have much choice in all this. I would argue that it is the Italian government that explicitly turned its budget into a confrontation with Europe. Spain and France’s cases show that the Commission can be very understanding if you frame your budget right (because it knows it can’t do much about it anyway). I think the Commission is very embarrassed by all this.
    _just a minor point on Greece, recognizing losses on Greek debt would have increased the deficit on a current basis but it would have had no effect on gross debt (which is the main metric used in EU fiscal rules). Moreover EU fiscal rules don’t care about the impact of one-offs on the deficit. So I highly doubt any government would have raised a “Greece tax” to “pay” for that.

    1. Yves Smith Post author

      Aha, your second point makes sense.

      Re the third, an article in Der Spiegel indicated otherwise. Maybe the ordoliberals actually believed Greece could be made to pay and losses on budget needed to be covered, and I misconstrued what they wanted to happen in Germany as EU policy.

    2. lou strong

      As for your first point, consider that while previous governments budgets previewed 1 as fiscal multiplier, this one is previewing 0,5 , then for the rest ( about Commission worries ) I don’t think this has much to do with Greek admission about fake accounts anyway .
      This brings to your second point, in this arm wrestling there are crucial matters and relationships of power that go far beyond a problem of confrontational manners or not .By the way the Commission turned a blind eye in the past as is doing now for other topics and subjects in favour of this and that , so it’s necessary to analize the EU and euro formal rules to have an idea of the language of screenplay , but at the same time it’s misleading to focus on the formal rules and attitudes as main explanations The schoolchild must be disciplinated , but not for etiquette reasons and not for breaking up some rule.

      1. Frenchguy

        Frankly, I’m of two minds about this, I do think the strategy is right (Italy could use fiscal stimulus) but the tactics are awful. In absolute, the 2.4% is not that far-fetched but that’s in an ideal world where nodoby is freaking out about it (I’d argue it would still be a bit optimistic, whatever the previous gov did, but not that much). In the real world, I don’t think there are many businesses that see this budget and say: “great, stimulus is coming, let’s increase investment to profit from the boost in activity”. Instead they are going: “shit, the bank probably won’t extend my credit line and there’s every chance the government ends up raising taxes to pay for all this mess, I better cut investment to save up as much as I can”. I am not saying they are right to think that but that’s kind of an auto-realization thing… In this context, forecasting only 2.4% of deficit is very optimistic.

        In the end, I think the Italian government could largely calm down the situation with a few gestures (it will have to lower the deficit target) and the Commission would probably be delighted to gloss over the fact that the end-result is very far from what the rules dictate. I fear it won’t because, politically, it has much more to gain by showing the finger to Europe. And if they go that way, the coming Italian recession will be as much the fault of Italian politicians as the no-deal Brexit will be the fault of the English ones.

        1. lou strong

          In the details the kind of fiscal stimulus that the government is choosing is badly adressed , but for the future there are reasons of worries more solid than pessimistic or optimistic forecasts on a 2,4 deficit. I stuck to my perception that these are smokescreens, and to my other feeling that the ball is primarily in the Commission field, and that the Commission is waiting for the spread to make discipline , and waiting eventually for this too ( please , if you want , read especially the part about Italian bonds as collaterals ):

      2. DavidEG

        The proposed budget is planning an increase of 1.2% of the fiscal deficit, in a time of economic growth (however weak), while backtracking on the two major reforms implemented in the last decade (pension and labor market reforms). It is introducing an income guarantee which is still largely up in the air and risks being unreasonably optimistic in terms of both effectiveness and fiscal costs. It contains growth forecasts that were rejected by the independent parliamentary budget office, to which the government basically said ‘meh’ (the only other time this happened, with the Renzi government, the budget was amended). It largely disregards the contractionary effect of higher interest rates on public debt. And so on and on. So it is the whole picture that is ugly, not just the numbers. Actually, it would’ve been a surprise if the EU didn’t reject the budget.

        As for your first point, consider that while previous governments budgets previewed 1 as fiscal multiplier, this one is previewing 0,5

        This line makes me think you are a reader of senator Bagnai’s blog (fittingly named ‘Goofynomics’). Honestly, it’s not worth your (or anyone else’s) time.

        1. lou strong

          Honestly , I’m not at all a senator Bagnai’s fan , but on the opposite I think it was a lot worth my time reading his blog in the past, as much as other blogs or sites by the way, as you can see with my previous Piie link , in order to get a full picture , if possible .In fact , I don’t recall exactly but I think I took the fiscal multiplier digits somewhere else . I tend to hear every side of the story, and synthetically while I don’t agree with , let’s say ,Bagnai’s posture of antieuro fundamentalism , I must admit that in the past he was farsighted about the crisis management and the crisis management effects, as you can easily check if you go back to his early Goofynomics posts , so to dismiss him it’s wrong .By the way the picture is ugly, but as much as I did previously, I suggest you not to focus on digits but on the game and hierarchies of power.

          1. DavidEG

            Sorry, but talking about ‘hierarchies of power’ to me sounds a lot like chalking everything up to a conspiracy, and Italy is in this predicament entirely to the fault of its political class.

            And about Mr.Bagnai being farsighted about crisis management – I will be most interested to see how him and his party are going to manage the next crisis in Italy.

            1. lou strong

              No conspiracy . Politics and economy are based on relationships of power, and being power capacity unequally distributed , there are hierarchies .It’s realism.
              Bare in mind that I agree with Yves Smith that exiting euro is almost impossible , so, as for the political class, guess who brought in the cage called euro ? A real cage , not even a golden cage .

        2. Yves Smith Post author

          Structural reforms = crushing labor and hurt growth. A recent post on VoxEU finally acknowledged that, that they are mainly counterproductive.

          1. DavidEG

            I think there were reasons that warranted the reforms of the labor legislation and the pension system in Italy, and backtracking now, after that the population had come to terms with them, is a completely irresponsible move.

            Anyway, even if we assume that reforms are bad, my point was that backtracking on them makes the proposed budget even more unpalatable to the EU. In the past, the Commission allowed additional fiscal space in exchange of the implementation of structural reforms, so it’s only natural that it would reject a budget that plans for more deficit spending while rolling back on reforms.

  4. Matthew G. Saroff

    Italy does not have a good hand here, but it has a better hand than Greece because:

    * Italy is the 3rd largest economy in the Euro zone. (most important, if Italy becomes Greece, it forestalls any other EU members from ditching their currencies for decades)
    * Unlike Syriza, they are not ineluctably wedded to the Euro, with both coalition partners being Euro Skeptic, which means that they actually have a little negotiating space.
    * The budget already calls for a primary surplus, and the best way to lower the debt to GDP ratio of Italy is to increase GDP.

    Still, I think that German bloody-mindedness and misguided economic theory makes a crack-up more likely than not.

    1. Synoia

      It was discussed on NC that while abandoning the Euro is a nice catch phrase, they are a few implementation details.

      The consensus was that conversion of the banking software and infrastructure would take, perhaps 3 years.

      1. The EU would not be passive during those 3 years.
      2. 3 Years is probably optimistic, why: 1 year for specification, 1.5 years implementation, 6 months for cut over seems very optimistic.

      The only case I recall of abandoning a currency link was the Irish Punt. But, that was well before 1980, the Irish Punt was solidly in circulation, the number of ATMs, size and significance of Credit Card networks much smaller, and Bank software are much larger now than the 1970s.

      1. Yves Smith Post author

        It isn’t that the EU would be passive. The people who were in the country abandoning the euro would move any savings to banks in other countries to escape forced redenomination. That scale of bank runs would put many if not most under.

      2. fajensen

        It was discussed on NC that while abandoning the Euro is a nice catch phrase, they are a few implementation details.

        The TSB-debacle is still ongoing. That was a mere Migration of 5 million customers accounts – but – Paul Pester at least got 1.7 Million GBP for leaving the job. I see incompetence is still well rewarded everywhere.

        Meaning the odds of completing any complicated working, with exacting requirements, just within twice the estimates made by qualified people, are very slim indeed. We are reaching an inflection point, where we will not be able to maintain our technological civilisation simply because the skills, the people to do the work and the ressources are not there anymore. They are looted by the 0.1%’ers.

        I.O.W. Italy moving to Lira again would be not 3 years, it would rather be around 10++ years, 3-7 of those years in various states of operational failure.

    2. Synoia

      Still, I think that German bloody-mindedness and misguided economic theory makes a crack-up more likely than not.

      No, never. No History of that! /s

      I suggest a visit to Prague, and its Castle. Thoroughly review the creation of the term “window of defenestration,” and reflect on it’s aftermath, the 30 years war.

  5. Oregoncharles

    Key clause: ” but Brussels deemed the forecast growth rates to be too high.”

    So the whole squabble is over an economic forecast that is, at best, arbitrary? That means the Italians have excellent reason to be defiant. It also means the EU can back down just by changing their forecast. If I was betting, I’d bet on changing the forecast, because a full-blown confrontation could wreck the EU – over, essentially, nothing.

    If the EU wants Italy out, they just did exactly the right thing. And yes, it would be nasty and chaotic – but for the EU, not just for Italy. A dangerously unpredictable situation, for the world economy as well as the EU. Remember, they have fights going with two other members, too, besides Brexit.

  6. Oregoncharles

    So my question about how the EU could collect the fine is answered: they control the Italian central bank. So it’s a sovereignty issue.

    What if Italy nationalizes their central bank? Yes, that would take them out of the Eurozone (?), or at least precipitate yet another power struggle – but so would collecting the fine. Again, the EU has now laid out a roadmap for Italexit. And they thought Brexit was a problem. As Yves points out, Poland and Hungary wait in the wings.

    Incidentally, it makes little sense to rip money out of the Italian budget when your issue is precisely that it’s underfunded.

  7. TedHunter

    This is getting interesting.

    Yves mentioned above the widely known budget deficit, 3%.

    The German economic daily Handelsblatt keeps repeating that the agreed Eurozone budget deficit is “0,8”.”Der Spiegel” adds that “0,8” is the target agreed upon b/w Eurozone and “the previous Italian government”.

    Does anyone have details on when and how 0,8 happened?

    Handelsblatt, Spiegel

  8. anarcheops

    The biggest lender to Greece was the various Eurozone nations. Even if they had gotten over their misguided faith in austerity, they were trapped by bad accounting and budget rules. For them to recognize the losses on Greek debt (which already existed in economic terms) by reducing the principal amount would have required them to recognize the losses in their budgets on a current basis. Not only would that have been a political death sentence, but also would have required them to raise taxes and/or cut spending.

    I think this is a crucial point that didn’t occur to me at first, so thank you for making it. That gives Euro countries an entirely different political motivation to promote austerity regardless of whether they “believe” in it or not.

  9. Mael Colium

    ” is the first time Brussels has refused to endorse an EU member state’s draft budget” ………. I suppose Greece is just a distant memory? Speaking of which, the EC is dealing with a different kettle of fish, so rather then eliciting the assistance of the Huns or IMF, expect them to screw Italy’s fiscal expansion by manipulating the bond markets and squeeze the new Government up to the point of capitulation …….. and then onto the next sideshow ride.
    Remind me why these States are part of the Union again?

    1. Yves Smith Post author

      We covered Greece in detail. The fight was not over its budget. The fight was over the terms of new debt agreements which would have Greece commit to budgeting certain levels of surplus (which were nuts) and “reforming” its pension, as in cutting them. Even though the Greek pensions were high by EU standards, it was their only social safety net (as in they had no unemployment insurance, no disability scheme). When you looked at the costs of other programs that Greece didn’t have, the pensions weren’t out of line, but no one in Greece made that argument well. The press in the rest of the EU would make simple comparisons of Greece’s pension costs v. theirs and that was that. There admittedly were some abuses, but the reforms went way way beyond cleaning that up.

  10. Tony of CA

    So what does Italy do? Just go long with the program until they have no functioning economy. This is madness. The system is becoming extremely volatile.

  11. KFritz

    I recall that Portugal rejected the orthodoxy of Neoliberalism and Austerity, and manged to avoid the very worst of the 2008 aftermath. But I can’t recall the details. Could Greece have used the Portuguese template to avoid its miserable situation, and could Italy do the same now?

    1. Clive

      Sort of. There’s an excellent précis here (registration needed but it’s free and the FT Alphaville site doesn’t pester or spam you).

      I won’t risk oversimplification by abridging the article in a comment. My take away, however, is that in essence the difference between Portugal and Greece was that Portugal took its neoliberal austerity medicine with less internal complaining than the Greeks made. Remember how so much of our interpretation of events is derived from the amount of coverage we’re exposed to. Greece made a lot of noise and got a lot of column inches. Portugal, by comparison, did not. Thus one is a “success”, one is “still carrying a legacy (etc.)”

      Neither, to me, is an example of a good outcome. Having your young, skilled population flee out of necessity is never a good thing for a society. And “not getting any worse” isn’t the same as “improving”.

      One area of study which I’d like to see explored in more detail is the Golden Visa aspect of Portugal’s recent economic development (in brief, this allows non-residents to apply for citizenship with a comparatively modest capital contribution — €200,000 if I recall rightly). It’s the oft-criticised “citizenships for sale” model. While sniffed at, London operates a slightly more upscale version of it. As, indeed does the US (but with a much higher capital contribution requirement, c. $2M and other strings attached).

      I suspect this has major positive effects for Portugal. But I can’t find empirical research to say one way or the other.

    2. PlutoniumKun

      As it happens, I’m soon off on my first holiday in a year to Portugal, so I’ll do some research on that :-)

      My understanding of the Portugal economic situation is that they were nowhere near as in as bad a situation as Greece, and benefited from a generally more competent and less corrupt public and private sector. They also benefited from having an under developed finance system, so never built up the huge debts of other Med countries.

      They steered a very careful course between austerity and investment, keeping their heads down so the Brussels Austerians never had them in their sights. To a certain extent, the Greeks became the ‘tall poppies’ who had to be cut down, while the Portuguese had more latitute to ignore euro laws.

      They also benefited very significantly from a surge in tourism – the instability of North Africa/Turkey/Middle East meant a lot of tourists kept to Europe, and Portugal seems to have benefited very significantly from this, Lisbon in particular.

      Another related issue is Brazil – Portugal has benefited from its historic connections to Brazil – its become something of an entrepot for educated Brazilians seeking to avoid the problems there. If Bolsonario is elected, there will be even more.

      Related to Clives point about investment visas, anecdotally, Portugal has undoubtedly seen an influx over the last few years of freelance workers, especially in areas like IT. From my occasional perusal of blogs and websites devoted to freelancers wanting relatively cheap, safe, and nice places to live, Portugal always scores very highly. Lisbon has become quite a hotspot for younger US and UK expats (the Web Summit is on there in 2 weeks, something I will do my best to avoid).

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