Italy has no future outside of the euro zone, top EU official warns

Europe News

As the standoff between Rome and Brussels continues, the EU has said loud and clear that there is “no future” for Italy outside the euro zone.

The European Commission — the legislation arm of the EU — and Italy have been arguing over Rome’s financial plans for 2019, after the new anti-establishment government in the country decided to increase public spending in the coming years.

In its plans for 2019, Rome said that it will increase the public deficit to 2.4 percent of GDP (gross domestic product) — three times higher than what the previous government had promised. However, taking into account all the new policies that Rome wants to put forward, the European Commission said Thursday that Italy’s 2019 deficit will in fact be 2.9 percent — close to the EU’s threshold of 3 percent.

The European Commission said previously that it’s not only worried about Italy’s headline deficit, but mostly with its structural deficit (which excludes the state of the economy). A deviation from the European fiscal rules could put Italy’s finances under closer scrutiny by Brussels and they could even be put under certain restrictions. The latter could be the so-called excessive deficit procedure (EDP), which aims to help countries correct their finances.

In 2020, the government deficit is projected to reach 3.1 percent of GDP, the Commission said, warning that risks related to market reactions could potentially worsen that forecast.

Italian bond yields have risen since May after two populist parties joined forces and formed a new government. Both the right-wing Lega and the leftist Five Star Movement want to deliver with key campaign pledges, such as a relaxation in taxes and previously-planned pension cuts. Rising bond yields essentially means investors growing more cautious about lending to the Italian government.

The European Commission has disagreed with Rome’s spending plans for the coming years and asked the country to submit a new draft budget by November 13. So far, government ministers have said they will not change their economic plans.

Speaking to reporters Thursday, Pierre Moscovici, a European Commissioner, said: “We would like Italy to remain what it is, a major country within the euro zone, there is no future for Italy outside the euro zone, there is no future for Europe without Italy.”

Moscovici also explained that the difference in the deficit forecasts between Rome and Brussels results from a lower growth projection and higher expenditure estimate from the Commission. “Our estimates are more cautious,” he said.

Brussels expects Italian GDP to fall to 1.1 percent in 2018 from 1.6 percent in 2017. Looking forward, Brussels forecasts the growth rate to be 1.2 percent and 1.3 percent in 2019 and 2020, respectively.

In its fall forecasts on Thursday, the European Commission projected lower economic growth for the whole of the 19-member euro zone.

GDP in the region is seen falling to a pace of 2.1 percent this year, after hitting a 10-year peak at the end of 2017. Furthermore, growth is expected to slow down to 1.9 percent and 1.7 percent in 2019 and 2020, respectively.

“There is a high degree of uncertainty surrounding the forecast and there are many interconnected downside risks. The materialization of any of these risks could amplify the others and magnify their impact,” the European Commission said in its fall 2018 economic forecasts report.

In particular, the European Commission is concerned about a potential overheating in the U.S. (which happens when an economy is growing at an unsustainable pace), and a consequent increase in interest rates — which could bring problems for European companies that trade heavily with the U.S. as well as for European banks.

Brussels is also worried over an escalation in trade tensions between the U.S. and China. Internally, apart from Brexit, the European Commission said that doubts over the quality of finances in certain countries could also shake the banking sector and economic activity.