Italy’s populist government’s bid to avoid a European Union disciplinary action looks more daunting than ever, as a new report shows the country’s economic woes are likely to continue.
On the same day Prime Minister Giuseppe Conte travels to Brussels for an EU summit, carrying a pledge for “constructive dialogue” with the EU commission over the country’s troubled finances, state statistics office Istat made the surprising announcement that the economy is likely to shrink again this quarter.
That further complicates the government’s efforts to meet its fiscal commitments, and opens the door to more questions on how Italy can rein in its debt, despite assurances in a six-page letter from Rome made public yesterday.
Istat sees a “relatively high” probability that the economy shrank this quarter — the third contraction in a year for the euro area’s third-largest economy.
Another contraction could amount to a body blow to Italy’s government at a time it’s engaged in tense negotiations with Brussels.
In his latest official communication with Brussels, Conte wrote that Italy won’t violate EU rules, but called on the union to examine how it can ensure a balance between stability and growth, and better manage bank crises.
Italy’s government bonds rose for six days, with the yield on the 10-year maturity down 8 basis points at 1:06pm Rome time.
The letter, long on rhetoric and short on detail, was finalized during a high-tension government meeting in Rome, also attended by Deputy Prime Ministers Matteo Salvini and Luigi Di Maio.
According to Italian media reports, Salvini and Di Maio blocked any attempt to spell out in specific terms what measures Italy would take to stave off a disciplinary procedure, something that Brussels is likely to raise with Conte during a two-day meeting started yesterday.
In radio interviews earlier yesterday, Salvini and Di Maio raised the heat in separate attempts to bolster support for their programmes: for Di Maio’s Five Star, the citizens income plan to distribute cash to needy Italians; for Salvini’s League, a flat tax he claims will help kick-start the economy. Implementing both measures would further swell the budget for next year.
Asked yesterday whether the new figures from Istat complicate negotiations with the EU, Salvini said, “quite the opposite, it actually tells us that cutting taxes is an urgency and an emergency. If the economy is stalling the only ways to kick-start growth are public works and tax cuts.”