03. July 2019, 15:48 Uhr
After an erstwhile escalation, this week appears to have brought respite for bond investors scared by deficit sanctions threatened by the EU against Italy. The populist government headed by Luigi Di Maio and Matteo Salvini seemed intent on defying Brussles over their budget entailing a massive decifit well beyond the eurozone’s mandatory fiscal standards; yet these days, they are absolving what seems to be a complete climb-down, to the huge relief of markets sending Italian government bond yields back to where they started before the stand-off. But will the truce last?
Or is it just part of the Italian government’s strategy to prepare its platform for the real insurgency against the alleged Brussels fiscal authoritarianism? We anticipate the latter.
Of course, Salvini and Di Maio have run into stiff resistence by their very own ministers, beginning with finance minister Giovanni Tria and leading right up to the top to Prime Minister Giuseppe Conte, both of which had been issuing assurances that Italy would not confront the EU over its budget. Conte went so far as to even threaten his resignation should the coalition partners not find to a more even-handed approach. But is that really the reason for Di Maio’s and, particularly, Salvini’s about-face? Most probably not.
These weeks have been seeing intense haggling over the slate of candidates for the EU’s top jobs after May’s elections to the European Parliament, resulting in a compromise only yesterday. With Italy losing its top seat at the EU’s table, namely Mario Draghi as the famed president of the ECB, it would seem that the populist coalition has decided to keep the peace in order not to further undercut its negotiation position for the remaining posts in Brussels and Frankfurt to be filled, after European elections in May had resulted in much chest-thumping by Matteo Salvini and his victorious Lega.
Against this backdrop, we expect the budget row to break out again full-scale after the summer, when the new EU Commission will start its work. Both Cinque Stelle and the Lega have too much at stake in delivering their ‘people’s budget’; giving in to what they have branded the EU’s fiscal dictate would hurt their electoral prospects hugely, which is why they will not do so eventually.