How Italy Leaves the Eurozone, Step by Step

Earlier today, Italy told the EU where to go with it budget demands. Expect the EU to huff and puff.

The EU demands Italy do something about its buildup of debt. In response, Italy dismisses 'implausible' EU forecasts, says budget is sound.

“There are no grounds for questioning the soundness and the sustainability of our reforms,” Prime Minister Giuseppe Conte said in a statement. “For this reason we consider any other type of scenario for Italy’s public accounts to be absolutely implausible.”

If Italy does not budge, the Commission could launch an “excessive deficit procedure” that could eventually result in fines, though these have never been levied on any country in the monetary union.

“The European Commission’s forecasts for the Italian deficit are in sharp contrast to those of the Italian government and derive from an inaccurate and incomplete analysis (of the budget),” said Economy Minister Giovanni Tria.

“We regret to note this technical slip on the part of the Commission, which will not influence the continuation of constructive dialogue with (it).”

Excessive Deficit Procedures Coming Up

Mercy, that sounds ominous, but I cannot any concrete example of the EU ever doing anything.

Reuters has a Factbox List of Key Dates, five of which have already passed with no consequences. Here are the remaining steps to laugh at.

  • Nov. 19: In the event its budget were rejected by the Commission, the Italian government would have three weeks from the date of the EU opinion to submit a revised budget.
  • Dec. 3: Monthly Eurogroup meeting.
  • Dec. 10: The Commission would have three weeks, likely until Dec. 10, from the submission of Italy’s amended budget to adopt a new opinion in which it would describe Italy’s overall budgetary position and its impact on the whole euro zone.
  • Dec. 13: The European Central Bank’s Governing Council holds a monetary policy meeting that is set to wrap up its bond purchase program, a widely expected move that could, however, further increase Italy’s spiraling debt servicing costs.
  • Dec. 14: EU leaders at their regular end-of-year summit would likely discuss Italy’s budgetary plans if no solution was found at this stage, further increasing market and peer pressure on Rome.
  • Feb. 4-7: This is the week when the Commission is expected to publish its economic forecasts up to 2020, which would show whether EU calculations match Italy’s growth, debt and deficit projections which underpin budget targets. The data could pave the way to sanction procedures if EU and Italian data differed widely.

Huffing and Puffing

That is a lot of huffing and puffing signifying nothing. Then what?

Then, under EU rules the Commission can send an “early warning” letter anytime to states that show a significant deviation from their targets.

Mercy.

Then, If Italy refused to change its draft budget, the Commission could open an excessive deficit procedure against Rome, which would likely push Italy again into the market spotlight, and could also trigger fines.

Then what?

Reuters notes "Sanctions procedures are usually started by the Commission when final data are available over a two-year period, which would mean that this decision would come in April 2019, just few weeks before the May’s European Parliament elections."

Just Italy?

It's not just Italy. The European Commission sent a warning on November 22, 2017 to Italy, France, and Romania over their budget plans for 2018.

A whole year has gone by.

Debt Rules

EU rules says that member states' debt should not exceed 60 percent of their GDP.

Hmm. It seems like Italy has been ignoring EU rules for something like forever.

Who hasn't? Good Question. The EC has this overview of Excessive Deficit Procedures.

26 of 28 Countries Triggered Excessive Deficit Procedures

Congratulations to Estonia and Sweden.

Meanwhile, please note that Spain has been in a state of continual excessive deficits since 2009, with no fines for continually missing targets.

Fine Coming Up?

The EU has never fined any country. Nonetheless expect the EU to threaten Italy with fines.

Walking Out of the Eurozone

Italy’s deputy prime minister Luigi Di Maio on Thursday reiterated his country had no plans to leave the single currency, but it would not change its 2019 budget deficit target despite its rejection by the European Commission.

Since the election, Italy has not threatened to hold a referendum. But a referendum and parallel currencies were part of the platform of some members of the coalition heading into the election.

Via open belligerence as opposed to making promises purposely never kept as Spain did, Italy is openly inviting the EU to tighten the screws, with fines, for the first time.

Also expect the ECB to rule it cannot hold Italian debt if the rating agencies downgrade Italy to Junk.

Should the ECB and EU act, Italians will blame those organizations, not the Italian government.

Meanwhile, resentment against the EU builds.

This setup is precisely how Italy leaves the Eurozone by default.

Mike "Mish" Shedlock​

Comments
LouisM
LouisM

I agree. Italy's breakup will be the Italian way. Britain was straight forward and held a referendum to leave. Like a needy self centered controlling girlfriend the response was "you cant break up with me unless I want to break up with you." Italy on the other hand wont bother with a referendum to leave...they will push the envelop until the EU wants them to leave or accepts it as preferable to a credit collapse, credit default or some other economic crisis at which point the Italians will be fine. It was a nice romance while it lasted but the immigration crisis and the decades of no growth because of the northern European/german bias is really what killed the romance. One has to thank the size of Italy and the Italian mentality because believe me Brussels and Berlin would love nothing more than to destroy Italy with de-industrialization, debt, austerity and immigration as they did with Greece. Yes, I have no doubt Brussels/Berlin tried that strategy in Italy but Italy was just too big to control and your seeing the backlash and the eventual divorce. The EU is powerless against Italy because all the nations of the VISEGRAD and eastern Europe would stand against Brussels/Berlin with Italy.

RonJ
RonJ

"EU rules says that member states' debt should not exceed 60 percent of their GDP."

In a financial crisis that never ends, rules go out the window. Just ask Ben Bernanke.

Christian dk
Christian dk

So why did Italy cheat to enter the Euro, with the help of goldman sachs...by double counting their gold...let me guess, Italys gold is deposited as collateral for the fake money printers of the ECB...who have now " borrowed " Italy 666 billion Euros.... ? How long can Italiens stay in the euro, and even buy gold / silver at rock bottom bargain prices..

JL1
JL1

Italian Elites like Euro because it has kept up their property values and value of their investments.

Italian political class used to like Euro because they could get cheap debt and spend much more in debt than they could have in Italian Lira.

For ordinary Italians Euro has been sold as lower interest rates but these lower interest rates have led to increase in real estate prices since people buy real estate based on the monthly payment.

This has led to young Italians being priced out of real estate and living with mom and dad stopping family formation and leading to crash in births.

Also many not educated Italians and factory workers and even some educated Italians ended up without a job since Italy could not compete in exports outside of Euro area because of high Euro.

Italy could not even compete in exports to Euro area since Germany was more efficient in manufactured products and since Chinese made cheap products flooded the markets after China joined WTO.

Situation now is that Italian products many times can not even compete in Italian market because Germany manufactures many products efficiently and rest is Chinese made crap.

Italy needs to leave Euro and return to their own Lira and make sure the Lira is freely floating.

In a freely floating Lira Italy would have about 30% advantage compared to Euro for italian internal markets, exports to Euro area and exports to outside Euro area.

Also real estate prices would crash hurting large real estate owners but helping youths and re-starting family formation and increasing the number of babies. Most people own 1 apartment or 1 house and live in it so it does not matter whether the value on paper is 100k or 200k...

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