Global Daily – Italy risks continue to build: Italy budget deadline 27th September - ABN

Aline Schuiling, Sr. Economist at ABN AMRO explained that Italy’s budget talks take place while the economic climate is cooling.

Key Quotes:

"Today the August manufacturing PMIs for the eurozone’s peripheral countries were published."

"They suggested that Italy’s economy is underperforming the eurozone as a whole and also other peripheral countries such as Spain."

"Indeed, Italy’s manufacturing PMI dropped by 1.4 points to 50.1 in August, while the eurozone aggregate fell by only 0.5 points, and Spain’s manufacturing PMI actually edged higher."

"During the three months since Italy’s new government was sworn in, the country’s manufacturing PMI has dropped by 2.6 points, suggesting that the industrial sector has lost considerable momentum. This means that the discussions about next year’s budget take place in a cooler economic climate, which would have resulted in a less favourable outcome for the budget balance even without any policy changes."

"According to the latest estimates by the European Commission, Italy’s budget balance would be around -1.7% GDP this year and stabilise at that level in 2019 without any policy changes. Given the loss of economic momentum, these estimates would probably have to be revised to closer to -2.0%."

"Meanwhile, the government has to present its targets for economic growth and government finances by 27 September."

"Finance minister Tria is committed to keeping the budget deficit within the 3% ceiling of the European Commission, whereas the two populist government parties are pushing to implement their two flagship policy measures (a flat tax and a guaranteed income for all citizens), which would together cost around EUR 70bn (equal to 4% of GDP) and lift the budget deficit to well above this 3% limit."

"If Mr Tria is serious about keeping the deficit to 3% of GDP, only around a quarter of the government’s plans could be implemented, which would probably be unacceptable for the two political leaders."

"Even in the unlikely event that Mr Tria succeeds in limiting the budget deficit to 3% throughout this government’s term in office, Italy’s debt ratio (132% GDP in 2017) would probably not improve much and move up in the coming years."