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Generational Dynamics World View
*** 24-Oct-18 World View -- European Commission rebukes Italy, after blatant budget rules violation

This morning's key headlines from GenerationalDynamics.com
  • European Commission rebukes Italy, after blatant budget rules violation
  • Greece's elderly still face possible pension cuts in January

****
**** European Commission rebukes Italy, after blatant budget rules violation
****


[Image: g161227b.jpg]
A horse-drawn carriage passes a branch of Banca Monte dei Paschi bank in Rome.

It's like writing a letter to your bank and saying that you'll
be making only half your mortgage payments for three years,
and that they should understand because you need the money. Your
bank would have to reject your statement forcefully.

On Monday, Italy's Economy Minister Giovanni Tria sent
a letter to the European Commission (EC), clearly saying that
Italy intended to violate EC budget rules from 2019-22:

<QUOTE>"As regards the path of the structural balance, the
Italian Government is aware of having chosen a budgetary policy
approach that is not in line with the application rules of the
Stability and Growth Pact. It was a difficult but necessary
decision ally of the persistent delay in recovering pre-crisis GDP
levels and the dramatic economic conditions in which the most
disadvantaged strata of the Italian society are found. The
Government also intends to implement the qualifying parts of the
economic and social program on which it has obtained the
confidence of the Italian Parliament. The Update Note of the
Economic and Financial Document, and the attached Parliament
Report, clarify that the Government plans to deviate from the
structural adjustment decrease in 2019 but does not intend to
further expand the structural deficit in the following two years
and undertakes to return the structural balance towards the
medium-term objective starting from 2022. If it were to return to
pre-crisis level before the forecast, the Government intends to
anticipate the return path."<END QUOTE>


This is a direct, and possibly unprecedented challenge by an EU member
state to the European Commission, and it required an unprecedented
response. The EC firmly rejected Italy's proposed 2019 budget, and
demanded a compliant budget within three weeks.

Readers may recall that when Italy held nationwide elections in March,
the elections failed to produce a majority party. Two particularly
bitter rivals were the left-wing Five Star Movement (M5S) that got 32%
of the vote, and the right-wing La Lega (The League) that got 17% of
the vote.

Incredibly, these two parties got together and formed a governing
coalition. They're far apart on many issues, but they do share
similar attitudes on three issues: a nationalistic anti-euro attitude,
a xenophobic anti-immigrant attitude, and a complete lack of fiscal
discipline. Much to everyone's surprise, they formed a governing
coalition based on these three principles.

This new governing coalition announced a list of policy proposals,
including a completely
delusional list of economic proposals.

Italian debt stands at around &euro;2.3 trillion ($2.7 trillion), or
133% of gross domestic product (GDP), the worst in Europe. The new
government does have a way of reducing the debt: spend a lot more
money, and drastically reduce taxes. (As I wrote at the time, I wish
I could tell you that this is a joke, but it isn't.)

Specifically, the government would like to do the following
right away:
  • Sharply cut taxes to a flat tax of 15-20%.
  • Give everyone a guaranteed free basic income of &euro;780 ($922)
    per month.
  • Increase pension benefits by substantially reducing the retirement
    age.

So now the time has come for Italy to submit a 2019 budget to the EC
to fulfill these delusional campaign promises, and the budget far
exceeds EC rules, as well as Italy's previous commitment to fiscal
discipline.

What we can say at this point with certainty is that, with the EU
already buried in problems from Brexit and immigrants, Italy's budget
is sure to create an additional huge new fracas.

It seems pretty clear that Italy's government is out of control
fiscally, and that they will be unable to stop themselves from going
into more and more debt. But as the saying goes: If something can't
go on forever, then it won't.

According to an analysis by Silvia Ardagna of Goldman Sachs,
Italy will not become fiscally responsible until some event
forces them to be:

<QUOTE>"Financial market participants understand there is
value in correctly pricing not just the 'end game,' but also the
path to that 'end game' and the risks around it.

From this perspective, our view is that market tensions would need
to intensify in order to exert sufficient pressure on the Italian
political system to trigger a change in the policy path and the
political rhetoric around it.

On that basis — and even if Italy does ultimately remain part of
the Euro area — the market situation may need to get worse before
it gets better."<END QUOTE>


Some people are speculating that the event will be "Italexit," with
Italy leaving the euro currency and possibly the European Union.
However, prime minister Giuseppe Conte said, "I can assure that this
executive will not accompany this country, Italy, out of Europe. We
feel very comfortable, we feel at home in Europe and we think that the
euro is our currency and will be our currency, the currency of my kid,
he’s 11 years old, and the currency of my grandchildren."

Commissioner Pierre Moscovici said that "this is an unprecedented
situation, and the decision should not be surprising to anyone as the
Italian government’s draft budget represents a clear and intentional
deviation from the commitments made by Italy last July." Italy's Economic Ministry (PDF) and European Commission and Business Insider and Politico (EU)

****
**** Greece's elderly still face possible pension cuts in January
****


Greece's elderly may not face pension cuts in January after all. The
planned pension cuts are part of the austerity program that the EU and
the ECB imposed on Greece in return for years of bailouts to prevent
the country from becoming totally bankrupt. The pension cuts are
necessary to increase the sustainability of Greece's social security
system, but apparently most members of the European Commission are
willing to put this measure on hold. The final decision on whether to
cancel the pension cuts will be made on December 3, but in fact the
pension cuts may be made anyway, since Germany opposes canceling them.

I tell this little story to remind readers that even though Greece's
financial crisis has been out of the news for a while, it has not been
resolved, and there could be a renewal of the crisis at any time.

Greece had to be bailed out in 2010 because the country was
essentially bankrupt. Greece was borrowing and spending way beyond
its capability to repay throughout the 2000s decade. According to one
analyst,

<QUOTE>"The history of [Greece's National Statistical Service
(NSSG)] reveals that its chief officer (general secretary) was
replaced whenever a new party was elected to power. The main
objective behind this practice was to control the flow of
information; in this respect, the personal or political allegiance
of the chief officer was the most crucial factor for the
appointment."<END QUOTE>


We can also say with certainty that if Italy goes on the spending
binge, the country will be deep trouble. I don't know why it's so
hard for people to understand that it's fun to borrow and spend money,
but it's extremely painful when you have to pay it back.

In order to fund its spending binge, Italy will have to borrow money,
and Italy will do that by selling government bonds. Moody's last week
downgraded Italy's bond rating to Baa3, which is the lowest possible
rating that they can have without becoming "junk bonds." In fact, a
lot of people breathed a sigh of relief because the downgrade was
anticipated, and it was feared that it would be to junk status.

Each time a bond's rating goes down, the value of the bond goes down,
and the yield goes up. The yield is the interest rate that the
government has to pay to investors who buy the bonds. So during
Greece's financial crisis, the yield on Greek bonds went to 5%, to 7%,
to 20% to 30% to 40%, and even more. Holders of Greek bonds
eventually had to take a 75% "haircut" -- which means that they lost
75% of their entire investments.

This hasn't happened to Italy yet. Italy's ten-year bond yields have
gone from 2% at the beginning of the year to about 3.5% recently. If
Italy's spending binge continues, then the yields will increase to 5%,
7%, 10%, and so forth, and Italy's debt will become unsustainable.

Even worse, many other banks in Europe have purchased Italian bonds.
About 20% of Italy's government bonds are held in other eurozone
countries. If yields go up and values go down, then these banks will
also be in trouble. That's called "contagion," Dear Reader, and the
fear of contagion will cause the European Commission to be very
critical of Italy's 2019 budget.

"It is tempting to try to cure debt with more debt, but at some point
the debt [becomes] too heavy and at the end of the day, you end up
having no freedom at all," Valdis Dombrovskis, vice president of the
European Commission, said during a press conference on Tuesday.
Kathimerini (Athens) and Kathimerini and CNN and CNBC

Related Articles

KEYS: Generational Dynamics, European Commission, Italy, Giovanni Tria,
Five-Star Movement, M5S, Luigi Di Maio,
La Lega, The (Northern) League, Matteo Salvini.
Giuseppe Conte, Greece,
Silvia Ardagna, Italexit, Pierre Moscovici

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24-Oct-18 World View -- European Commission rebukes Italy, after blatant budget rules - by John J. Xenakis - 10-23-2018, 10:15 PM
RE: Generational Dynamics World View - by tg63 - 09-25-2019, 11:12 AM
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