Italian politics shook the Eurozone, the UK, and even China on Monday.

The standoff between the European Commission, the European Council and Rome is escalating, triggering global financial tremors.

Panic Monday

The Euro fell to a seven-week low against the US Dollar on Monday.

The British pound and the Chinese Yuan also lost ground.

The Milan stock exchange lost 300 points with banks taking the hardest hit. The Athens Stock Exchange followed, with investors scared of the political risk spreading across the Eurozone’s periphery.

Meanwhile, Italy’s 10-year bond yields (BTP) crossed the 300 basis-points mark. The BTP yield is now 3,03%, up from 2,85% October 5. These are the highest yields Italy has faced since February 2014.

Rome is defying Brussels and has resolved to maintain a 2,4% budget deficit, which is three times higher than the commitment taken by the previous government. That is 1,4% more than what the Council of Ministers asked from the newly elected government in July.

Rome’s defiance is shaking markets. Italy is the third biggest economy in the Eurozone with an industrial base second only to Germany.

The Rome-Brussels-divide

The standoff is about to culminate as the Italian government will deliver a draft 2019 budget to the European Commission on October 15. Theoretically, the European Commission could send the Italian budget back and demand amendments. That would be unprecedented.

In a letter to Italy’s Economy Minister Giovanni Tria, the European Commission estimates that in 2019 Italy’s structural deficit, which excludes one-offs and business cycle effects, would rise by 0.8% of GDP. That is a concern given Italy’s 133% debt-to-GDP ratio.

However, the Italian government has promised to gradually reduce the Italian deficit in 2020 (2,1%) and 2021 (1,8%).

Political Context

During a press conference, Deputy Premier and Interior Minister Matteo Salvini blamed speculators, referring to a “Soros-like manoeuvre” that has little to do with the real economy.

Salvini also said that he shares the view with the leader of the Europe of the Nation’s group at the European Parliament, Marine Le Pen, that the real enemy of Europe is the European Commission.

 “We share the same idea of Europe, of agriculture, of work, of the fight against immigration”, Salvini said. We are against the enemies of Europe, who are Juncker and Moscovici,” he added.