Euro Macro: Italy heading for excessive deficit procedure – The Italian government announced a higher than expected budget deficit target of 2.4% GDP for 2019 at the end of last week. The consensus forecast seemed to be for a number of a little below 2% GDP. In addition, it represents a sharp increase compared to the target of the previous government (0.8% GDP). Over the coming weeks we will be getting more details about the budget, while we should also see a reaction from the European authorities. Up until now, the details that have been communicated about the budget are sketchy. Nevertheless, based on what has been announced so far, we think that there is a material risk that the actual outcome for the budget deficit in 2019 could turn out to be higher than the target. The cost of the increased spending and tax cuts seems to imply a bigger fiscal deterioration. In addition, the economic outlook for Italy has deteriorated in recent months and it is unclear whether the government has fully taken this on board in formulating its target for the budget deficit.
Meanwhile, the Italian government is scheduled to present a draft budget to the European Commission (EC) by 15 October. If the EC is not happy with it (which is very likely) it can make recommendations for changes, and ultimately place Italy in the Excessive Deficit Procedure (EDP) again. Although Italy’s budget deficit is targeted to remain below the 3%-ceiling set by the EC, it can be placed under the procedure because it has a debt ratio well above 60% that is not being sufficiently reduced. Under the EDP, Italy would be subject to extra monitoring and recommendations. If the Italian government does not adhere, it can result in fines of up to 0.2% GDP. Ultimately though, if the Italian government is determined to push ahead with its budget plans despite the pressure and possible fine, it can do so as the individual eurozone member states still have fiscal sovereignty.