Italy’s budget has prompted EU backlash because its three year deficit plans breach rules on government borrowing. As a result, Italian shares and bonds have experienced a sharp sell-off. This has been caused by the concerns of investors regarding the deepening tensions between the Italian government and the European Union.

At the end of September, the Italian government set a budget deficit next year equaling 2.4% of Italian GDP.

Despite this figure being below the EU’s deficit limit of 3% of GDP, the news was not well received. This is because Italy is the third-largest economy in the Euro zone, and yet has a debt second to Greece. Equally, under the current budget plan the structural deficit would rise which goes against EU regulations.

But, the Italian government’s initial response was to not back down. They refused to revise Italy’s budget despite growing pressure from Brussels and Italy’s Euro zone partners. Italy’s economy minister, Giovanni Tria, attempted to ease tensions by claiming the country will try to cut its deficit in 2020 and 2021.

But, Italy’s budget is still harming the financial markets.

The euro reached a seven-week low against the US dollar. This is following Italy’s deputy prime minister’s, Matteo Salvini’s, claim that EU leaders were “enemies of Europe”.

Milan’s FTSE MIB was at its weakest level in 18 months at 2.4%. Equally, yields on ten-year Italian bonds rose to the highest they have been in four and a half years. As a result, it has become even more expensive for Rome to borrow money.

Yesterday, Matteo Salvini continued to criticise the European Commission President Jean-Claude Juncker and European Commissioner Pierre Moscovici.

“The enemies of Europe are those sealed in the bunker of Brussels.”

“It’s Juncker and Moscovici who have brought fear and job insecurity to Europe.”

Bannockburn Global Forex’s chief market strategist, Marc Chandler, has expressed the fears of many investors. “This confrontation is set to escalate, and this is hurting Italian assets”, he said.