The European Commission has rejected the budget proposal for France, Spain, Belgium, Portugal, and Slovenia saying none of the EU members meets the bloc’s recommended targets for cutting longer-term deficit cycles, an announcement that comes on the heels of Brussels’ rejection of Italy’s budget proposal, which caused the euro to fall to a two-month low against the US dollar on October 19 as the EU voiced strong criticism of the Eurosceptic Italian government’s 2019 budget deficit target of 2.4%.
The Commission responded to the Italian proposal by sending a letter to Rome suggesting that Italy must reverse its planned “unprecedented breach” of EU fiscal rules. The Commission’s letter is the first formal step toward officially rejecting Italy’s budget and imposing a fine on the government.
European Economic Affairs Commissioner Pierre Moscovici said on October 19 that the next step in the process is in the hands of the Italian authorities, who have said that they plan to respond to Brussels’ formal warning some time early in the new week.
Credit Rating agency Moody’s downgraded Italy on October 19 but kept its outlook at stable. Deputy Prime Minister Luigi Di Maio stepped later suggested that the Italian government is open to the possibility of negotiating with the Commission.
Apart from the crisis, the broader question for investors is whether the European Central Bank will be forced to review plans to unwind its fiscal stimulus program by December 2018.
At the same time, the CEO of the Italian systemic bank UBI, Victor Massiah, said Italy’s rising bank spread means lenders are forced to withhold liquidity. “The lower the coefficient of capital, the lower the leverage for the bank sector to make loans,” Massiah told the Italian public news agency ANSA.