What is the conflict between Italy and the EU about?

  • To stimulate the economy, the budget plan of Italy is that they will spend more than they receive
  • But the government debt is already so big that the EU sees it as too big of a risk
  • Italy is too big to fail, and they know that

 

Quick history: after the creation of the euro, countries like Greece and Italy borrowed way more money than before the euro. When after the crisis these countries were about to default on their loans, they looked at Germany for money. Germany agreed to help them with the condition that certain fiscal policies would be adhered to. The countries which needed the money agreed, and Europe became close to what is known as a fiscal union. A fiscal union is a union of countries where there is a central place which has the authority to restrict the government spending or raise taxes in countries.

Fiscal supervision is not popular

As you can understand, these policies are not very popular. Italy has recently published their budget for the upcoming year and it has a deficit of 2.4% of their GDP. Because of the agreements made after the eurocrisis, the budget should first be send to Brussel for approval. The response with regard to the Italian budget plan was a strong rejection. The deficit for upcoming year is way too large, and thus a big risk in the eyes of the EU. For Italy they think that this is the only way to stimulate the economy.

Bigger government spending for a better economy

Economically, it’s going well for Europe. With a GDP growth of 1.7%, everything seems to run smoothly. Some countries stay a little behind, and need more government spending to keep the GDP growing. One of those countries is Italy. Last year their GDP growth was 0.8%, and the government had a budget deficit of 2.3% of the GDP. In general, government spending will cause economic growth. When the government does this, mainly two things happen, more jobs are created and the inflation rises. This in turn increases what citizens spend, and will also increase the tax income of the country.

Rome vs Brussel

So Rome is not willing to change its budget plan after rejection from Brussel. But Brussel thinks the risk is just too high to have such a big budget deficit, while the debt of Italy is already that high. The EU has the ability to give fines if a country does not comply with its rules. But this is highly controversial, as giving a fine is a burden on their debt.

In general, Italy is now seen as a risk for investments. There are already stories of rich people who get their money out of Italy and into Switzerland. The outflow of money from will be clear when the Target2 balances for this month will be published. Besides this, the bond prices of the Italian government have surged a whole lot, and people are talking about Italy getting out of the EU and a possible Italian crisis.

What do you think will happen? Put your thoughts in the comments below!

 

Written by Cornel de Vroomen

Geef een reactie

Het e-mailadres wordt niet gepubliceerd. Vereiste velden zijn gemarkeerd met *