Global Daily – Italy’s fiscal headaches

Euro Macro: Italy’s debt ratio higher than thought before – Eurostat published new estimates for the government budget balances and debt ratios in the individual eurozone countries yesterday. The new estimates show that Italy’s debt ratio was significantly above the levels that were originally estimated during the years 2015-2018, with the 2018 ratio revised higher to 134.8%, up from the earlier estimated 132.2%. Meanwhile, Italy’s new centre-left coalition government still is discussing the 2020 budget, which should be approved by Italy’s parliament before the end of the year and also needs to be approved by the European Commission. Getting the budget approved by Italy’s parliament has become more complicated as Prime Minister Conte needs the support from the left-wing populist Five Star Movement (M5S), the centre-left Democratic Party (PD) as well as the liberal Italia Viva (IV), which recently split from the PD. IV holds 27 of the 630 seats in the lower house and its support for the plans of the coalition government of M5S and PD (which hold 216 and 89 seats, respectively) is needed to pass the budget.

Getting the budget approved by the EC will also be complicated. Italy’s debt ratio (the second highest within the eurozone following Greece) is more than double the EU-ceiling of 60%. The European fiscal rules state that it needs to be reduced at a ‘significant’ pace towards the 60%-level. In its latest agreement with the EC from December 2018, the previous government had agreed that the debt ratio would gradually decline during the period 2019-2021, to reach 128.2% GDP by 2021. Considering that Italy’s growth outlook has deteriorated significantly since then (we estimate Italy’s GDP to show roughly zero growth this year and in 2020), it is very likely that the government debt ratio will actually increase in the next few years and that the country will move back into the EC’s Excessive Deficit Procedure. (Aline Schuiling)