The Italian government will not back down in its standoff with Brussels over its 2019 budget despite threats from the European Central Bank (ECB) that it is considering measures to prevent contagion that could stem from a potential Italian crisis.
Italy has a 2.4% of GDP target for 2019, which Brussels has argued is not in line with the bloc’s Stability and Growth Pact.
The Italian government, however, has argued that it needs to boost growth amid conditions of deceleration. Italy’s Economy Minister, Giovanni Tria, has offered to introduce a fiscal “safeguard cushion” that will kick in if the target of 1.5% growth for 2019 is not reached.
At the same time, a surge in Italy’s cost of borrowing is raising fears of contagion across the Eurozone. While speaking at a UBS conference in London, the ECB’s chief economist Peter Praet suggested that Italy’s continued woes could affect Greece, which only just recently was taken off Brussels’ sinners’ list after it completed the final review of the EU’s bailout package.
Praet suggested that the European Stability Mechanism may have to intervene as a way to calm market worries.
While the ESM is willing to step in to control contagion, the ECB is reluctant to support Italy if the current surge in borrowing costs continues to escalate. The ECB will end its €2.6 trillion bond-buying programme, as scheduled,in December.
Since September, finance ministers have been discussing the possibility of the ESM stepping in with precautionary credit lines (PCCL, ECCL); while the International Monetary Fund also stands ready to assist. However, it is clear that such credit comes with a political stigma that makes countries reluctant to use them as an option.
To secure ESM support, countries need to have what is considered sustainable public debt and abide by the fiscal compact.