Quitaly Risk Is Real As Markets Tumble

Published / Last Updated on 28/09/2018

Italian Banking CrisisThe Italian coalition government of both anti-establishment and anti-immigration – the right wing ‘League’ and the left wing ‘5 Star Alliance’, yesterday produced its radical Budget for 2019 that many economic commentators suggest could put Italy in breach of EU debt limits and inadvertently break the Euro and ultimately the European Union itself.

The Budget proposes:

  • Higher tax free personal allowances
  • Income tax rates of just 10% and 20%
  • Lowering the state pension age with also a minimum income guarantee

All 'vote winners' but forecasts suggest that this approach, of course popular with voters, is unsustainable given that it would increase the budget deficit over GDP from 0.8% pa to 2.4% pa.  This may not seem a lot but it is huge, in the €billions of going further ‘overdrawn’ each year.

Already, EU rules restrict budget deficit increases to no more than 3% of GDP per year and if you are over budget, you should be planning to reduce debt rather than increasing it.  Whilst this again may not seem much, Italy is the 2nd most indebted Euro zone nation with debts of €2.3 TRILLION!  Only Greece has more debt than this.  Italy is also the third largest ‘euro’ zone economy behind Germany and France, so this really is much more serious than many realise.

What happens next?

As part of the Eurozone, Italy must now send its Budget proposals to the EU, it will then be scrutinised by EU officials and sent back with suggested changes, if any, in November.  Italy is not obliged to implement those changes and they would not prove popular with the people.  If the coalition does back track on promises and tighten controls if the EU suggests them, they must implement the Budget (or amended one) by the end of the year. 

Comment

Confidence in Italy may fall, a bail out may then be needed.  Do you think Germany can really afford this given that France is not exactly the most healthy economically anyway?  No wonder German stock markets were down nearly 2% at one point today.

 

We keep warning of a global debt mountain and believe this will be the next ‘market crash’ catalyst.


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