EU rejects Italy budget in unprecedented move

Reuters

• European Union formally rejects Italy’s budget plans,
  an unprecedented move.
• Speaking on Tuesday afternoon, Valdis Dombrovskis, the
  European Commission vice-president responsible for the euro
  said that Brussels had “no alternative” but to reject the
  proposals.
• Italy has proposed increasing its budget deficit to
  levels far above those previously agreed.

The European Union on Tuesday formally rejected Italy’s proposed
budget, a highly unusual move which threatens to spark chaos
within the eurozone.

The budget proposes 
increasing
both Italy’s overall government debt and its deficit in the short
run,
 pushing the deficit as high as 2.4% of GDP
over the coming years. This means that Italy will fall foul of a
previously mandated maximum deficit level of 0.8% of GDP. As a
result, the EU decided to reject the proposals.

Speaking on Tuesday afternoon, Valdis Dombrovskis, the
European Commission vice-president responsible for the euro said
that Brussels had “no alternative” but to reject the proposals,
adding that even after giving Italy a chance to make changes to
the budget, it had refused.

After a letter was sent to Rome late last week, the Italian
government did not “change our earlier conclusions of a
particularly serious non-compliance,” Dombrovskis said.

The European Union has never formally rejected a eurozone
member’s budget plans. The Italian coalition government now has
three weeks to make changes requested by Brussels, or risk being
subject to sanctions from the EU.

Yields on Italian bonds rose on the news, reversing a small
decline seen over the past few days. The benchmark 10-year bond
hit 3.59% soon after the news. The FTSE MIB share index was
little changed, but remained more than 1% lower on the day as

part of a wider stock market sell-off.

Brussels’ rejection of the Italian budget comes soon after

Goldman Sachs warned that the market turmoil witnessed in
Italy in recent months — which has seen the Italian stock market
enter a bear market, and the country’s bonds hit their highest
yields since the eurozone crisis — could get worse.

Goldman Sachs economist Silvia Ardagna wrote this week that
Italy’s “market situation may need to get worse before it gets
better.”

Ardagna argued that for the Italian government to back down
in its fight with Brussels, it will need a serious
motivation. One such motivation, she said, would be a further
market correction.

“From this perspective, our view is that market tensions would
need to intensify in order to exert sufficient pressure on the
Italian political system to trigger a change in the policy path
and the political rhetoric around it.

“On that basis — and even if Italy does ultimately remain part of
the Euro area — the market situation may need to get worse before
it gets better,” she added.