The European Commission has warned that Italy’s huge public debt poses a threat to the entire Eurozone, and it is only being exacerbated by the policies of its populist government.
The Eurozone’s third largest economy slipped into its third recession in a decade last month. It entered a technical recession after contracting for two consecutive quarters.
“Italy is experiencing excessive imbalances. High government debt and protracted weak productivity dynamics imply risks with cross-border relevance, in a context of still high level non-performing loans and high unemployment,” the European Commission said.
Italy faces high unemployment rates, particularly among its youth.
“The government debt ratio is not expected to decline in the coming years, as the weak macroeconomic outlook and the government’s current fiscal plans, though less expansionary than its initial plans for 2019, will entail a deterioration of the primary surplus,” it said.
Italy’s debt ratio is more than twice the EU limit, and looks like it wont be declining any time soon.
“Italy is in a special situation because it is a country with a very high debt level and it is critical that debt does not start growing again,” Pierre Moscovici, the European Commissioner for Economic and Financial Affairs, announced at a news conference.
In an unprecedented turn of events, the European Commission rejected Italy’s original 2019 draft budget last October. Its controversial budget plans sparked months of quarrelling with Brussels over the ambitious proposal that breached rules on government borrowing. It wasn’t until December that the populist government reached an agreement with the European Commission on the 2019 budget, with its deficit target reduced.
The recession that it faces means that the country’s growth targets, approved under its budget, are highly unrealistic.
In an interview with Bloomberg News, the French Finance Minister Bruno Le Maire said last week that the situation in Italy “will have a significant impact on growth in Europe and can impact France”.
EUR/USD was last trading at 1.1388.