In a move bound to help Beppe Grillo’s Five Star movement, Brussels Warns Italy to Cut Public Debt by April.
The European Commission said on Wednesday that Italy’s debt represented “a major source of vulnerability” as it urged Rome to meet its commitments to adopt pension reforms and other “structural measures” worth 0.2 per cent of gross domestic product.
Valdis Dombrovskis, vice-president of the commission in charge of eurozone issues, said: “as of today there would be a case to open an excessive deficit procedure for Italy”. Formal decisions on whether Rome has done enough to meet its obligations would be made in May, he said.
“I sincerely hope and believe that this fiscal effort can be delivered on time,” said Pierre Moscovici, the EU economy commissioner.
Brussels noted that Germany’s current account surplus, which is estimated to have hit a record 8.7 per cent of GDP in 2016, was “not healthy” for the euro area, creating “very significant distortions both economically and politically”. But the commission held back from applying additional pressure on Berlin to boost spending.
The warning to Rome is the latest chapter in a long-running saga that has seen Italy repeatedly fail to honor its commitments to rein in its debt, which is set to rise to 133.3 percent of GDP this year. Last autumn, the commission was taken aback by Italy’s draft budget plans for 2017, which ran roughshod over pledges of fiscal discipline made only several months earlier.
Last year, Mr. Moscovici called on the euro area to back a fiscal expansion of up to 0.5 percent of GDP — an indirect way of asking Germany to boost spending, which was rebuffed by Berlin.
Germany’s Current Account Surplus
Excessive Debt Threats Will Help Five Star Movement
Moscovici wants more spending in the “EU Area”, but not in Italy, Greece, Spain, France, or Portugal.
How will that message play in those countries?
Matteo Renzi, PD party has plunged in recent polls due to splintering.
On February 20th, Enrico Rossi, governor of Tuscany; Michele Emiliano, governor of Puglia; and Roberto Speranza, the former PD leader of the chamber of deputies – co-authored a note saying they were splitting from Renzi.
Yesterday, Emiliano, decided to abandon the split and instead fight Renzi from within.
Sum of the Parts Less than the Whole
Polls for PD have now fallen to the 22-23% range.
Via email, Eurointelligence comments on the sum of the parts:
“We think the polls underestimate the effect of the split on support for the PD. The Italian secessionists may only be able to capture 5-8% of the votes, according to opinion polls. But the total sum of their support and the PD’s support will be less than the combined support previously. And don’t take it for granted that Renzi’s possible strategy of a grand coalition with Silvio Berlusconi’s Forza Italia will work. If the PD gets 20% and FI get 15%, where do the remaining 15% come from?”
Today’s announcement will further eat into support for PD. The other parties will attack Brussels with far more credibility than Renzi will be able to muster.
A coalition of anti-euro parties would be an odds on bet if elections were held today.
- On November 21, 2016, I commented Renzi Faces Three Opposition Parties, All Rabidly Anti-Euro.
- On February 20, 2017, I commented “Italeave” Odds Increase: Rebellion in Italy, Matteo Renzi’s PD Party to Split.
Mike “Mish” Shedlock
Germany transfers its surplus or leaves the Euro.
Merkel proposing a return to the DM would save her, the Euro area, shut up Trump, reduce German inflation and sideline the likes of 5 Star.
Surplus transfer = German backlash.
Medex Man said:
Germany will leave the EU or Germany will die (and then the EU won’t have a sugar daddy / will die anyway). It doesn’t matter if Merkel stays or goes, “its the economy dumbkopf”
Italy and France will leave the EU also — they can’t pay their bills and need to default (they need to admit they can’t pay).
germany has been engaging in a deliberate policy of increasing neighbours debt to pay for german imports, most of which they don’t need. germany cannot be the best in every sector, yet this is belief of germans – that most non-german goods are inferior at any price. this may be true, but it is not the basis for a partneship of countries. germany plays no part in lifting the skill set of non-germans via exchange/upskilling of labour outside Germany and no non_german country in the EU wants to adopt Germany’s model of becoming “brain-dead” population conformance in exchange for quality of goods and services via some of the most restrictive labor laws on the planet. (don’t try hanging your washing on the line on a sunday in germany either).
italy needs an exchange rate adjustment to price its goods and services some 30% lower than Germany’s – so does France, Spain, Portugal, Greece and the other mediterranean countries. benelux can limp along somehow, but it too is subservient to the German model of selling goods and services to other European countries AND GETTING indirectly PAID BY THE ECB, which monetizes the sovereign debt of non-German European countries – none of which can afford to pay the debt back to the ECB – which in turn is a bankrupt ponzi scheme.
It is a commercial 4th Reich.
It was intended to be. They tried twice through war (lost), this time via EU control (won).
“On 9 September 1914, the Imperial Chancellor, Bethmann-Hollweg, wrote: “Russia must be thrust back as far as possible from Germany’s Eastern frontier and her domination over non-Russian vassal peoples broken…We must create a Central European Economic Association through common customs treaties to include France, Belgium, Holland, Denmark, Austria-Hungary and perhaps Italy, Sweden and Norway….
All members will be formally equal but in practice under German leadership and must stabilise Germany’s economic dominance over Central Europe”.
The EU fits this long-held purpose exactly,which is the reason for the EU’s present proxy war in the Ukraine. If Mr. Putin stops the insane eastward expansion of the EU project, the “Drang nach Osten”, he will have done us as big a favour as the Red Army did at Stalingrad.””
What they could not obtain with weapons they obtained by debt. Germany has a federal debt of 80% of GDP so they have debt issues themselves. In addition Germany has financed its exports by building up a huge imbalance within the Target 2 system. Bundesbank alone is owed € 800 bn by weak NCBs. So they export cars but they don´t get paid. What´s the point in producing and selling cars and not getting paid?
Imagine a economy with too many high paying jobs that makes things which other people are willing to buy at a premium. Imagine a economy where politics is boring and uneventful. A county with budget surpluses so consistent and so large that it’s considered uneighborly.
And this is a problem ?
Not everyone can run a surplus. It’s a conundrum but German behaviour/performance is not compatible with a currency union of diverse economies.
One government forvall might cope but imagine the backlash when German taxes are directly used to assist southern Europe. Southern might ultimately be in so much pain they sign away all controls but will Germans hand over their tax Euros directly?
One government and get rid of national democracies and turn them into local federations might work else the likes of AfD and LePen are always a risk when the locals have had enough of sharing their income.
Strongest should leave Euro first.
They won’t though, not until one or more countries show it the finger debt wise and makes it look stupid and victim, and even then it will try to hang on and forge some sort of new approach.
Not everyone can run a surplus.
Yet Germany wants Greece to have a surplus (primary account surplus more accurately), of 3.5% for decades.
And what to do about Italy, Portugal, and Spain?
Assumptions are impossible. Meanwhile, debt piles up. If interest rates rise in Italy, it is in severe trouble.
What could possibly force that?
Could German inflation force political divergence that breaks the Euro? Some Bundesbank falling out with the ECB?
Not if Schulz has anything to do with it but Merkel and Schauble might see the light in time and plan for a DM return. The south might float off with a much lower euro suited to Italy, Portugal, Spain.
Pre-emptive action makes sense.
Greece ships a crate of Ouzo to Germany and earns A€
Germany with a hangover ships a VW to Greece and earns 2A€
Balance of trade is plus A€ to Germany.
However an € to Greece is worth an uprising, very costly, but an € to Germany is on tap, ready as can be. That is to demonstrate simple surplus accounting is not straightforward and depends on the relative meaning of the unit it uses.
Now imagine a €, which is created in a banking credit creation process, has its meaning changed by Central Bank actions ( interest rate for example), let us take it to an extreme. Germany created its € credit for the Ouzo at 1% interest, it must repay a fraction each year at least, but it has A€ surplus in the bank after selling the VW, so is in surplus.
Greece created the 2A€ to buy said VW at -1% interest, so is paid a fraction each year of what it has borrowed. Accounts say Greece has a trade deficit of A€ ( 2A€ out for the VW but 1A€ in for the Ouzo), however if you look how those accounts settle without any other trade, you notice that Greece runs a surplus as it is being paid to borrow – that 2A€ it paid is positive to a degree, but not negative as the longer the loan is held the more it earns , plus it has the A€ from the Ouzo.
Germany also is in surplus, it has the additional A€ from the VW minus interest paid on the Ouzo purchase.
This is an oversimplified example, but just to point out that because the value of the unit used is subjective, even though its meaning is accounted for in a balanced way, the actual meaning of the numbers used to carry accounts are necessarily subjective also, and may easily mislead.
Another way of looking at it- if they both get paid to borrow and spend, they both end up with a monetary surplus from a trade that would otherwise be neutral.
With negative rates debt is credit, and so the deficit, which is debt, becomes a surplus, while the credit, which is surplus, becomes only less surplus.
Hence all is surplus, just like the €.
I’ll bow out of trying to understand that world.
Oops, replied above my last comment instead of here.
Justin Lee said:
But it’s a zero sum game. Germany, which pretends it’s a globalist, wants to dominate all the economics in the EU. The other states are weak regional players in industrial areas. All the money surplus ends up in Germany plus it’s the alpha debt holder . That’s great for Germany, but why does the rest of the world need to buy in?
I think the reason for that is because the solution would break-up the Euro that is a major pillar of the European Integration project and the IMF are well on-board as was the Obama administration.
For whatever reason no one dare shout about it. Keep quiet, hope the problems sort themselves out, the Euro survives and the EU integrates. Don’t call a spade a spade – that is Germany hiding behind a weaker currency than the DM would be.
These imbalances are precisely why every effort will be made to keep the Euro going.
It’s the 2nd reserve currency so any break-up will have big ramifications. Germany benefits, the EU goes on its merry way so France is happy with more influence than it would otherwise have.
Downside are excessive trade imbalances and areas of Europ that can’t get off their knees because if the Euro does get to where it needs to be for them Germany will see >> 3% inflation and beat-up the ECB and in the meantime see even higher trade surpluses.
Shhhhhhh – don’t mention it, it’s not politically correct.
John k said:
Germany can’t have reserve currency and doesn’t want it anyway. Foreign savers want to save dollars so must sell us more stuff than we sell them. This demand for dollars also bids up dollar value, pricing our goods out of global markets.
World has too few dollars to meet demand, solution is higher fiscal deficit, which usefully also puts our workers to work.
Excessive debt procedure
This is also a major risk globally – http://www.telegraph.co.uk/business/2017/02/22/eus-currency-nationalism-could-splinter-worlds-financial-system/
Greece again, throw in Italy and it’s toast as a currency union without root and branch change.
“Is there a prospect of a fourth bailout? Yes. Even in the best case… I doubt that Greece will be able to stand on its own feet” – George Papaconstantinou, a former Greek finance minister
The choice for Italy is either to leave the EU or to have all Italians send all of their money to the creditor nations within the EU.