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EU rejects Italian draft budget, setting up standoff with defiant Italy


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EU rejects Italian draft budget, setting up standoff with defiant Italy

By Alissa de Carbonnel

 

2018-10-24T083108Z_1_LYNXNPEE9N0LR_RTROPTP_4_EU-ANNIVERSARY.JPG

A European Union flag flutters near the hand of a statue on Campidoglio square in central Rome March 23, 2007. REUTERS/Tony Gentile/File Photo

 

STRASBOURG (Reuters) - The European Commission rejected Italy's draft 2019 budget on Tuesday, saying it brazenly broke EU rules on public spending, and asked Rome to submit a new one within three weeks or face disciplinary action.

 

Italian bond yields jumped on the unprecedented move by the EU executive which was exerting for the first time a power obtained in 2013 after a sovereign debt crisis to send back a budget of a euro zone country that violates the rulebook.

 

Having recently emerged from the Greek debt debacle that nearly destroyed the single currency, the EU is concerned about another possible crisis if debt-laden Italy were to lose market trust.

 

The Commission has previously dealt with France, Spain, Portugal and past Italian administrations that broke EU fiscal rules, but none of those violations were as blatant as the latest Italian budget draft, the Commission said.

 

"Today, for the first time, the Commission is obliged to request a euro area country to revise its draft budget plan," Commission Vice President Valdis Dombrovskis told a news conference. 

 

"The Italian Government is openly and consciously going against the commitments it made."

 

Yields of Italian benchmark 10-year bonds surged on the news to 3.57 percent in the afternoon from 3.42 early on Tuesday.

 

Rome will now have to send a new draft budget that would cut the structural deficit, which excludes one-offs and business cycle swings, by 0.6 percent of GDP, rather than increase it by 0.8 points as in the current plan, the Commission said.

 

ITALY DEFIANT

In a letter to the Commission on Monday, Italy acknowledged that the draft violated EU rules, but said it would stick to its guns. Deputy Prime Minister Luigi Di Maio responded to the Commission rejection by calling for "respect" for Italians.

 

"This is the first Italian budget that the EU doesn't like. I am not surprised. This is the first Italian budget that was written in Rome and not in Brussels," Di Maio said on Facebook.

 

Speaking during a trip to Russia, Prime Minister Giuseppe Conte said he expected "frank and constructive" discussions with Brussels over the fiscal package, adding that plans to hike the deficit to 2.4 percent of GDP "won't be touched at the moment".

 

A spokeswoman for the economy ministry in Rome defended the expansionary budget and said Italy remained convinced that the only way to cut public debt was by boosting economic growth.

 

Italy has the second highest debt-to-GDP ratio in the EU after Greece, at 131.2 percent in 2017, and the highest debt servicing costs in Europe. But it believes additional spending through a higher deficit would boost growth, helping reduce the debt-to-GDP ratio.

 

The Commission believes Italy's growth assumptions are overly optimistic making the debt reduction plan questionable.

 

"Experience has shown time and again that higher fiscal deficits and debt do not bring lasting growth. And excessive debt makes your economy more vulnerable to future crisis," Dombrovskis said.

 

Unless Rome changes the deficit assumptions, the Commission said it would start disciplinary steps, called the excessive deficit procedure.

 

Under EU law, Italy should cut its public debt every year by 1/20 of the difference between 60 percent of GDP and its current size, counted on average over three years -- in Italy's case meaning several percent of GDP a year.

 

The excessive deficit procedure can lead to fines of up to 0.2 percent of GDP if recommendations to cut the deficit and debt are ignored.

 

(Additional reportin by Gavin Jones in Rome; Writing by Jan Strupczewski; Editing by Robin Pomeroy and Crispian Balmer)

 
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-- © Copyright Reuters 2018-10-24
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Italy is a sovereign nation within the EU, yes?

 

It has elected a government, (one which I suspect I would not much like, were I an Italian, but that is not relevant) with a particular program, yes?

 

The EU commission has now instructed that government that it cannot follow it's mandate, yes?

 

Right ho. Italy is a sovereign nation within the EU?

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1 hour ago, JAG said:

Italy is a sovereign nation within the EU, yes?

 

It has elected a government, (one which I suspect I would not much like, were I an Italian, but that is not relevant) with a particular program, yes?

 

The EU commission has now instructed that government that it cannot follow it's mandate, yes?

 

Right ho. Italy is a sovereign nation within the EU?

They can always leave the EU

 

They want to continue as a member? Obey the club rules or get the other members to change them

 

Dealing with Italy is like dealing with kids

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8 hours ago, candide said:

One cause of the problem is the large share of the shadow economy. If they were able to collectvtaxes on it. There would be no deficit.....

Maybe the EU could have a word? Or are they nervous of shadows?

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10 hours ago, JAG said:

Italy is a sovereign nation within the EU, yes?

 

It has elected a government, (one which I suspect I would not much like, were I an Italian, but that is not relevant) with a particular program, yes?

 

The EU commission has now instructed that government that it cannot follow it's mandate, yes?

 

Right ho. Italy is a sovereign nation within the EU?

Actually the problem is not so much the EU than the financial markets. The EU cannot really sanction Italy and if they do, it will take some time. The reaction of the financial markets following the ratings by Moody's etc... will occur much faster and Italy will find out that it cannot borrow money on external markets at a good rate. So unfortunately, the burden will likely be transferred to Italian taxpayers.

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8 hours ago, Grouse said:

They can always leave the EU

 

They want to continue as a member? Obey the club rules or get the other members to change them

 

Dealing with Italy is like dealing with kids

It's not that simple. On the one hand, Italy surely bears some responsibilities (i.e. its shadow economy). On the other hand, a policy of fixed deficit levels does not make sense, as it should depend on the conjoncture. The Fed model is probably more efficient, as economic growth is part of its objectives, and not only the inflation rate (as is the case for the ECB).

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19 minutes ago, candide said:

Actually the problem is not so much the EU than the financial markets. The EU cannot really sanction Italy and if they do, it will take some time. The reaction of the financial markets following the ratings by Moody's etc... will occur much faster and Italy will find out that it cannot borrow money on external markets at a good rate. So unfortunately, the burden will likely be transferred to Italian taxpayers.

no, the financial markets are not to blame, they just lend money at a rate adjusted for risk.

 

the problem is the EU / ECB system, where other member countries guarantee loans taken on by any member.

 

the idea was to allow honest member countries whose economy is not too strong access to low-rate loans. unfortunately, the system has already been frauded by several countries, among which Greece, and caused a near-collapse of the system a few years back.

 

the financial markets are often just applied mathematics, especially when it comes to bonds/loans. mathematics can't be at fault.

the fault lies with how the guarantee system was designed.

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10 hours ago, JAG said:

Italy is a sovereign nation within the EU, yes?

 

It has elected a government, (one which I suspect I would not much like, were I an Italian, but that is not relevant) with a particular program, yes?

 

The EU commission has now instructed that government that it cannot follow it's mandate, yes?

 

Right ho. Italy is a sovereign nation within the EU?

Italy traded away part of its sovereignty by introducing the EURO and the mechanisms designed to safeguard its monetary value, especially regarding maximum allowed deficit.
So no, EU nations are not totally sovereign anymore, and obligations imposed by international treaties weigh heavier than a member state's national constitution, the only way would be to repel the EU treaties.

 

taking on more debt causes inflation. it means every EUR holder loses money just to finance Italy's needs.

before, Italy was regularly devaluating its currency to offset foreign loans and to make its products more competitive on international markets. in the end, nobody lent in Lira anymore and Italy's access to finance was difficult, unless paying high interest in foreign currency.

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6 hours ago, manarak said:

Italy traded away part of its sovereignty by introducing the EURO and the mechanisms designed to safeguard its monetary value, especially regarding maximum allowed deficit.
So no, EU nations are not totally sovereign anymore, and obligations imposed by international treaties weigh heavier than a member state's national constitution, the only way would be to repel the EU treaties.

 

taking on more debt causes inflation. it means every EUR holder loses money just to finance Italy's needs.

before, Italy was regularly devaluating its currency to offset foreign loans and to make its products more competitive on international markets. in the end, nobody lent in Lira anymore and Italy's access to finance was difficult, unless paying high interest in foreign currency.

Corretion: EU nations that are in the Eurozone have a lot less sovereignty. There are a few EU nations I believe that don't have that problem. 

 

In addition, Eurozone rules call for budget deficits no bigger than 3% of GDP. Italy's proposed deficit is 2.4%. So the Eurozone administrators are enforcing an illegitimate limit.

 

In addition, the relation between inflation and deficits isn't nearly so straightforward as you make it out to be. As you may recall, despite the huge budget deficits in the USA during and after the Great Recession, inflation was actually too low. But the US recovered more quickly than any other major developed nations. Whereas the Eurozone imposed austerity on its members and did a lot worse than those EU non-Eurozone members.

 

 

 

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5 hours ago, Tailwagsdog said:

Sovereign nation or not ..when you lose control of your currency you lose control of your economy.

the next question is, can the economy be controlled to a significant extent?

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22 hours ago, JAG said:

Italy is a sovereign nation within the EU, yes?

 

It has elected a government, (one which I suspect I would not much like, were I an Italian, but that is not relevant) with a particular program, yes?

 

The EU commission has now instructed that government that it cannot follow it's mandate, yes?

 

Right ho. Italy is a sovereign nation within the EU?

The m next time you sign up for a gym contract or a car loan, will we see you at the European Court of Human Rights complaining that you as a sovereign individual shouldn’t be required to respect the obligations you signed up for? 

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On ‎10‎/‎24‎/‎2018 at 5:55 PM, JAG said:

Italy is a sovereign nation within the EU, yes?

 

It has elected a government, (one which I suspect I would not much like, were I an Italian, but that is not relevant) with a particular program, yes?

 

The EU commission has now instructed that government that it cannot follow it's mandate, yes?

 

Right ho. Italy is a sovereign nation within the EU?

All this failure by Sovereign countries, Italy, Greece, France, Spain and Portugal - all being "told" by unelected, and corrupt EU officials, what they can do or not do, Kind of puts the British desire to rid themselves of this self serving, failing organisation into clear perspective. It was never going to work but they, the above, all want their piece of the pie, namely being bailed out when their corrupt, ineffective policies/mandates fail spectacularly - supported by their inability to take control of their unchecked spending and greed are revealed to the world. All 5 of those countries are utterly incompetent in fiscal matters.

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3 hours ago, welovesundaysatspace said:

The m next time you sign up for a gym contract or a car loan, will we see you at the European Court of Human Rights complaining that you as a sovereign individual shouldn’t be required to respect the obligations you signed up for? 

No, you won't, because 1) it is a jolly silly comparison and 2) it has nothing to do with, and completely misrepresents the point I made.

 

As someone has already pointed out, the defecit which would result from this budget would actually be within the guidelines. It is within the obligations Italy signed up for.

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2 hours ago, Bundooman said:

All this failure by Sovereign countries, Italy, Greece, France, Spain and Portugal - all being "told" by unelected, and corrupt EU officials, what they can do or not do, Kind of puts the British desire to rid themselves of this self serving, failing organisation into clear perspective. It was never going to work but they, the above, all want their piece of the pie, namely being bailed out when their corrupt, ineffective policies/mandates fail spectacularly - supported by their inability to take control of their unchecked spending and greed are revealed to the world. All 5 of those countries are utterly incompetent in fiscal matters.

Really? France is incompetent? It's GDP to debt ratio is 97 percent. The UK's is 87%. To your mind that's a crucial difference. And France is being "told" to do what?

As for Spain, it had actually had a very low GDP to debt ratio that was declining  before the financial crash. It's debt was imposed by the EU to bail out banks that had made bad loans to private investors, mainly in the construction trade.

And since these are problems associated with the Eurozone, what do they have to do with the UK? As you may recall, it's not a member.

And the reason Greece and Portugal got into such a mess was because EU banks were only to happy to lend those governments money since they knew that they could count on the Eurozone powers that be to bail them out. Whatever happened to due diligence?

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EU doesn't want it's member states to make the same mistakes Greece did earlier. It's quite simple procedure to make sure that Italy can't drive itself to towards bankruptcy, like Greece did. 

 

Both of these countries share similar tendencies. Highly corrupted countries with a large amount of money going towards grey markets. Quite like UK actually. UK does have much better economy, which helps it. 

 

To weed out the corrupt practises, the budget needs to be in balance. I suppose it will be as Italy doesn't seem to show any eagerness to leave neither EU or Euro. 

 

It's always best to prevent the disaster than let it happen and then blame others for it's cause. 

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13 minutes ago, oilinki said:

EU doesn't want it's member states to make the same mistakes Greece did earlier. It's quite simple procedure to make sure that Italy can't drive itself to towards bankruptcy, like Greece did. 

 

Both of these countries share similar tendencies. Highly corrupted countries with a large amount of money going towards grey markets. Quite like UK actually. UK does have much better economy, which helps it. 

 

To weed out the corrupt practises, the budget needs to be in balance. I suppose it will be as Italy doesn't seem to show any eagerness to leave neither EU or Euro. 

 

It's always best to prevent the disaster than let it happen and then blame others for it's cause. 

Actually, the procedure should be to let the banks who lent these countries the money in the first place go bankrupt Instead the EU props them up. 95% of the cash that supposedly bailed out Greece actually went to the banks. And the idea that imposing strict austerity on these economies is the avenue to prosperity is belied by the sorry economic performance of most of the EU in the wake of the Great Recession.

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3 minutes ago, bristolboy said:

Actually, the procedure should be to let the banks who lent these countries the money in the first place go bankrupt Instead the EU props them up. 95% of the cash that supposedly bailed out Greece actually went to the banks. And the idea that imposing strict austerity on these economies is the avenue to prosperity is belied by the sorry economic performance of most of the EU in the wake of the Great Recession.

In principle I agree. However I'm not educated how the international banks actually work to say if that's the best course of action.

 

Yesterday I watched a documentary of banking crises in UK, when Bank of Scotland almost collapsed the whole UK economy. 

 

I really don't like the idea of bankers getting all the benefits and leaving the ordinary, not so rich people, to take care of the mess and pay the bill what these fruitcakes caused and spend for their own benefits. 

 

These banks and bankers should pay the price of their actions. I wouldn't mind seeing few short flying bankers exiting their banks as carrying their responsibilities with them, all the way to the ground. 

 

 

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8 hours ago, oilinki said:

Highly corrupted countries with a large amount of money going towards grey markets. Quite like UK actually. UK does have much better economy, which helps it. 

That is a fairly remarkable suggestion. Would you care to explain it?

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On 10/24/2018 at 5:55 PM, JAG said:

Italy is a sovereign nation within the EU, yes?

 

It has elected a government, (one which I suspect I would not much like, were I an Italian, but that is not relevant) with a particular program, yes?

 

The EU commission has now instructed that government that it cannot follow it's mandate, yes?

 

Right ho. Italy is a sovereign nation within the EU?

 

It's not unimaginable that one day, not to far away, that the EU will want to approve political parties in their member states; then confirm election results are 'acceptable". 

 

Not imagination - just listen to the comments from some of the old EU super state advocates.

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4 minutes ago, Baerboxer said:

 

It's not unimaginable that one day, not to far away, that the EU will want to approve political parties in their member states; then confirm election results are 'acceptable". 

 

Not imagination - just listen to the comments from some of the old EU super state advocates.

Oh I absolutely agree, it is not that big a step from their actions with the previous Greek and Italian governments, and their reaction to Hungary and perhaps Poland.

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On 10/24/2018 at 7:29 PM, candide said:

One cause of the problem is the large share of the shadow economy. If they were able to collectvtaxes on it. There would be no deficit.....

You mean like Thailand which has one of the largest shadow economies in the world. 41% on last report.

At least Thailand doesn't have the Asian equivalent of a strong arm bullyboy EU to have to contend with. 

Those poncing, grandstanding useless Brussels trough snorters love pushing EU member countries around. The UK can consider themselves lucky if they can escape their clutches. 

Good luck Italy, sock it to them!

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46 minutes ago, Cadbury said:

You mean like Thailand which has one of the largest shadow economies in the world. 41% on last report.

At least Thailand doesn't have the Asian equivalent of a strong arm bullyboy EU to have to contend with. 

Those poncing, grandstanding useless Brussels trough snorters love pushing EU member countries around. The UK can consider themselves lucky if they can escape their clutches. 

Good luck Italy, sock it to them!

Nice one...have a choccy!

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