The Italian challenge

Italian Deputy Prime Minister and Minister of Economic Development Luigi Di Maio, Prime Minister, Giuseppe Conte, and Deputy Prime Minister and Interior Minister Matteo Salvini, hold a press conference in Rome on the country’s draft budget
Italy’s leaders, including Prime Minister Giuseppe Conte (C) are in a standoff with the European Union over the country’s draft budget (source: dpa)
  • Italy’s financial problems are less dramatic than they seem
  • The real problem is that EU policies have encouraged member states’ profligacy
  • Rome’s fight with Brussels challenges the EU’s ability to continue such policies

Italy’s new government continues to send ripples throughout the European Union and financial markets. At first blush, it is doing nothing dramatic. According to the government’s initial announcements, in 2019 the budget deficit should reach 2.4 percent of gross domestic product (GDP), as opposed to 1.6 percent (the previous figure accepted by Brussels) and to 2.0 percent (the expected figure). Although the revised level is higher than one would want, it is no foretaste of financial disaster, even considering Italy’s high public debt (133 percent of GDP) and its low growth rate (1.2 percent in 2018). Yet, market players have been taken by surprise and the EU authorities have bitingly complained.

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