In an unprecedented move the European Commission has told Italy to revise its budget, a move never seen before within the European Union (EU).
Italy is currently the eurozones third largest economy but has spiraling debts amounting to 131% of national ouput. Italy’s governing populist parties have vowed to push ahead with campaign promises including a minimum income for the unemployed. Other measures include tax cuts and scrapping extensions to the retirement age – fulfilling several key campaign promises from the election in March. Italy now has has three weeks to submit a new, draft budget to Brussels.
How could this impact the Euro?
Surprisingly this news didnt have a bigger impact on euro exchange rates. Initially the euro weakened to fall as low as 1.1350 (GBP/EUR) but the euro recovered in the afternoon session. A move that was a little surprising. Although the USD did make some significant advances with EUR/USD falling to a two months low of 1.1420 with the dollar benefiting from its safe haven tag
This move by the European Commission is bold. It is something we have not seen before and has set a precedent for other EU members. It has now shown that they will not simply continue to bail countries in a move to discourage other eurozone states from breaking rules.
In response Italy have set them selves on a collision course with the EU, Deputy Prime Minister Luigi Di Maio wrote on facebook “This is the first Italian budget that the EU doesn’t like. No surprise: This is the first Italian budget written in Rome and not in Brussels!”
His co-deputy PM Matteo Salvini added: “This doesn’t change anything.”
“They’re not attacking a government but a people. These are things that will anger Italians even more,” he said.
This unprecedented move could cause some significant implications for the eurozone and hence the euro. I wouldn’t expect any significant moves for GBP/EUR due to ongoing Brexit issues, however the US dollar is likely to be the main benefactor here.
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