The European Union rejects the draft budget of the right-wing populist Italian government. In it Lega-chief Matteo Salvini and Luigi di Maio, of the Five-star movement have planned a deficit of 2.4 percent of economic output. In the case of the defeated previous government, the figure was much lower. With the high borrowing Lega and Five star, among other things, want basic protection, according to the model of Hartz IV, there are several tax Finance relief and a lower retirement age.
It can not afford to Italy, higher debt at all. The country has now one of the exorbitantly high sovereign debt. Rome has a debt mountain of around 2.3 trillion euros piles up. The are more than 133 percent of gross domestic product (GDP). Italy has the second-highest sovereign debt in Europe. Only Greece, with nearly 180 per cent worse.
the EU sanctions are a “toothless Tiger”
because of the dramatic Figures, the EU Commission rejected on Wednesday the Italian draft budget final- a in the history of the Eurozone unprecedented step. Now Italy face a deficit procedure.
At the end of a measure such as high fines. They amount, according to the EU rules, up to 0.2 percent of annual economic output. This was 2017 at 1.7 trillion Euro. The penalty could be up to 3.4 billion euros. It is also possible that Italy’s claims on funds from the European structural funds will be reduced. However, the politicians know in Rome: The EU has imposed such penalties to date.
Even if the EU intervenes this time, it can take years to go into the country, until the penalty is due. The procedure for the excessive deficit procedure are long and go through many stages. Ultimately, it is also a political decision as to how quickly the process is moving forward. The Commission before the European elections in may 2019 massive pressure, it would provide the populist government in Rome is likely to be additional ammunition for the election campaign and for attacks on Brussels. A time Limit there is not, the Commission could initially rely more on dialogue attempts with Rome.
Whether or not the lead to success, doubts Clemens Fuest, head of the Ifo Institute. Compared to FOCUS Online, the renowned Economist said: “Matteo Salvini, has announced publicly that you take the next letter from Brussels, be polite to knowledge and answer, the Budget is not, however, change. The Italian government takes the EU deficit procedure is not serious and hopes to benefit politically from a confrontation with Brussels.” Northern League chief Salvini sliding the Problem in Italy of the EU in the shoes, so Fuest.
The markets of Italy penalties it is already
Officially, the Italian government does not want to repair, so turn-in and your budget. However, internally, the nervousness is rising. One reason for the growing concern: Italy has to pay for its government bonds with much higher interest rates than, for example, Berlin.
On Wednesday the Minister of Finance of Tria was in view of the recent substantial rise in yields for Italian government bonds, “of Course I’m worried.” To do this, the politician has every reason to be: His interest expenditure on newly issued government bonds amount to a multiple, as the Federal Finance Minister, Olaf Scholz.
for example, government bonds with 10 years to maturity Italy, Republic of EO-B. T. P. 2018(28) to 95.04 Prz. To +0.22 (+0,23%) Stuttgart price data
Italy
Republic of Italy EO-B. T. P. 2018 (28); conditions: coupon rate 2,800 %; maturity: 1.12.2028; Effective interest rate to 3.47 %
Germany, fed.Germany Anl.v.2018 (2028) 101,95 Prz. +0,18 (+0,18%) Hannover To the rate of data
Federal Republic of Germany bond of 2018 (2028); conditions: coupon rate: 0,500 %; maturity: 15.2.2028; Effective interest rate of 0.47 %.
The comparison of the two-state bonds: The interest rate differential (“Spread”) between German and Italian bonds with 10 years to maturity is currently three percent, or in financial English 300 basis points.
financing of Italian debt getting more expensive,
debt for the government and taxpayers an enormous tax.
example:
answer: Germany and Italy, respectively, on each of which a bond in the amount of 100 billion euros.
According to the above-mentioned Figures, Germany would have to pay the investors for computationally 470 million in interest per year. The Italian Minister of Finance, would, however, fork out with 3.47 billion euros, many times over.
Brussels relies on speculators and big investors
the Etatstreit between Brussels and Rome Escalates further, could get investors cold feet: Then banks, investment funds and insurance companies would part with a large style of Italian government bonds. The result: The courses of Italian government bonds to fall and the Real interest rates to climb.
such A development would put Italy’s government is really under pressure and the Minister of Finance would have to offer investors higher interest rates. The ailing Italian banks would suffer. You have bonds on their books full of native state, which would then lose value. The banks would have to keep their money together and to be able to spend less loans, which would strain their already small profits.
Higher interest rates for government bonds, many financial products
more expensive Because government bonds are a kind of “rate compass” for other financial products and services in an economy, rose in the described scenario, many financing costs for the citizens: interest rates for installment loans, account Overdrafts (“MRP”) and real estate loans would increase. Corporate bonds would require higher interest rates.
This is not a theory: Already now, Italy’s citizens are suffering from higher interest rates for home loans. The Trend continues, would private consumers and companies due to rising costs of financing their demand throttling, and the economy cripple. The result of this: The Italian government takes less in tax and have to spend more money for a growing number of unemployed.
Clemens Fuest: “Only a crisis forces Italy to relent”
such escalation Clemens Fuest thinks is absolutely necessary, so that Italy falls into line in the budget dispute: “A crisis in the financial markets is the only thing that could move the Italian government is currently to reverse,” he explains. In his view, the Risk premiums will remain “high, but a real crisis is not likely before the next major economic downturn”. In order Fuest approves, indirectly, the sub – strategy – the EU.
An impending decline of the Italian economy is likely to play the EU is in the cards. Because a sell-off of Italian government bonds would be the funding costs for Rome to once again rise massively. The hope in Brussels is that If our Penalty has no consequences, could bring the markets to the Italian government to its senses.
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In the FOCUS Online/Wochit DIW chief warns of “Chaos in Italy could the German economy into the abyss” mbe/with Material of dpa and dpa-AFX Lega Five-star movement government debt government bond deficit procedure, Clemens Fuest
