Tensions between the European Commission and the Italian government marked 2018 in the eurozone. The Christmas agreement put an end to the months of tension, but there is a chance that tensions will flare up again this year.
Recently, the International Monetary Fund (IMF) released new estimates for economic growth in 2019 and 2020. Something that struck me was that the growth forecast in Italy for 2019. Where the IMF previously assumed growth of 1%, this has dropped to just 0,6% since this week. The Italian newspaper 'La Repubblica' reports that the EC will shortly adjust the growth estimate for Italy to 0,6%. It is this readjustment that could lead to renewed tensions in the eurozone.
However, the above means that the agreement on the Italian budget for 2019 can go back into the trash. The foundation under that budget is also economic growth for 2019. In the Christmas Agreement between Rome and Brussels, all calculations about income and expenditure have been made with an economic growth of 1%. If the growth is lower, those calculations have to be done again. And that has a higher budget deficit result. That, in turn, could reignite the tension between Rome and Brussels, with dire consequences.
New reality
If Italy adjusts its budget plans to the new worsening economic reality to ensure that the budget deficit does not increase, then there is nothing to worry about. In this case, adjusting is a euphemism for spending less and/or increasing taxes. Judging by the first sounds from Rome, I think the chance that the Italian government will adapt without a fight is even smaller than that of a Dutch ski jumper winning the Ski Jumping World Cup.
Giovanni Tria, Italy's finance minister and responsible for preparing the budget, said more government spending was the only right policy in this economic phase. He rejected the recommendations of the IMF and the European Commission to build financial buffers. According to him, they would a new crisis to care. "No new cuts or tax increases are needed this year, even if the economic situation deteriorates significantly," he said.
A hot spring
Loosely translated, it means that the probability that Italy will adjust the budget in such a way that the planned budget deficit does not exceed 2019% in 2,04 is in my view equal to the interest rate of the ECB. In other words: we must seriously take into account that tensions will again arise between Rome and Brussels in the coming months. However, in the end I also see this ending with a sizzle.
In addition, Italy has had 66 governments since the end of World War II. On average, 1 Italian government is in office for about 1 year. The current government took office on May 31, 2018. In short: if history is somewhat indicative, it wouldn't be surprising if the Italian government falls somewhere in the coming months and so there are new elections.
The irony is that the market is better off if Italy turns out to be in recession. In the third quarter of 2018, the Italian economy shrank by 0,1%. If the economy has contracted in the last months of 2018, then there is a recession. Economists speak of this when growth shrinks in 2 consecutive quarters. In a recession, Brussels can accept a higher budget deficit from Italy without losing face, which could lead to no/less tensions between Rome and Brussels.
Difficult to estimate
Any new tensions could also make life miserable for the European Central Bank (ECB). It is then more difficult to estimate the economy in 2019 and 2020. Italian banks could also run into trouble again due to the falling prices of Italian government bonds, which can be expected in case of new tensions.
Interest rates in the strong euro countries (the Netherlands and Germany) could then temporarily come under downward pressure, mainly because many investors would take shelter there. This is not only due to the possible tensions, but also because of the European elections at the end of May. There, the various anti-euro and anti-EU parties may score better than the polls show.