European Central Bank warns new Italian government over spending | News | DW | 24.05.2018
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European Central Bank warns new Italian government over spending

The ECB has warned the new Italian government to stick to EU budget rules rather than launch into new spending projects, given its €2.3 trillion debt. Eurozone finance ministers took a softer line.

Italy's new populist government, headed by the anti-establishment 5-Star Movement and far-right League, has outlined plans for tax cuts, a basic monthly income and continuity for pension payments.

But Europe's third-largest economy has a debt burden representing 132 percent of its annual economic output, which is more than double the EU permitted limit of 60 percent. Only Greece has a similar ratio.

In its biannual financial stability review published on Thursday, the European Central Bank warned: "A loosening of the fiscal stance in high-debt countries could impact the fiscal outlook and, by extension, market sentiment."

Borrowing costs in Italy pulled back from Wednesday's 14-month high on Thursday afternoon with benchmark yields on 10-year government debt at 2.32 percent — 180 basis points higher than for German 10-year bonds.  But the Italian bond yields remained far below the 7 percent levels reached during the euro zone debt crisis in 2011 and 2012.

Eurozone finance ministers

Eurozone finance ministers meeting in Brussels on Thursday expressed some guarded appreciation for comments from the designated Prime Minister Giuseppe Conte, choice of the 5-Star Movement.

German Finance Minister Olaf Scholz said: "It is a very good sign that the future Italian prime minister has made a very pro-European statement," that he wants to abide by the rules jointly agreed in Europe with his government. 

Conte had said on Wednesday night: "I'm ready to defend the interests of Italians in Europe and internationally, maintaining dialogue with European institutions and representatives of other countries."

Who for finance minister?

The ECB and international investors are looking to see who is named Italy's finance minister.

On Thursday, the name of 81-year-old Paolo Savona appeared to be top of the list. Savona had been a minister in the 1990s when Italy joined the eurozone but the academic and banker has since described the euro as a flawed project. In his latest book, Savona called Italy's euro entry a "historic error" and suggested a "plan B" be drawn up for Italy to leave, if necessary.

Savona wrote in his book that the eurozone was tailor-made for Germany and accused Berlin of trying to dominate Europe economically, having failed to do so militarily in World War II.

Italy's League party leader Matteo Salvini repeated his support for Savona on Thursday:  "It seems that in the past he had some doubts about the use or effectiveness of the euro," Salvini said on Facebook. "He is an economist respected in the whole world ... but what has he done wrong? He has dared to say that the EU as it stands is not working properly." Salvini said he would welcome working with a man of Savona's experience.

Conte spent Thursday finalizing his proposed cabinet list which he has to present to President Sergio Mattarella before the government can be sworn in, and be put to a confidence vote in parliament.

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jm/aw (Reuters, AP)

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