Following an unconfirmed report on Monday that Italy faces a €3.5 billion fine from the European Commission unless Europe's largest sovereign debtor curbs its debt levels, moments ago Bloomberg confirmed that the Commission has indeed put Italy's debt once again in its sights, sending a letter to the Italian finance minister in which it warned Italy that it has not made sufficient progress towards compliance with its debt-reduction obligations, and is at risk of disciplinary measures in accordance with EU law.
The Commission specifically asked Italy to provide explanations about 2018 debt by May 31, which the Commission will take into account in its final report on the matter. In response, an Italian Finance Ministry spokesman said minister Giovanni Tria "received as expected" a letter sent by the European Commission on the nation’s debt and “stands ready to reply."
And while the European Commissioner for Economic and Financial Affairs, Moscovici, noted yesterday that he is not in favor of sanctioning Italy, the market is having flashbacks to the controversial Italian deficit negotiations of 2018 which sent Italian bond yields soaring, and the result was an immediate drop in the Euro to session lows...
... while Italian 10Y bond yields bounced.
The European warning comes at a time when Italy's resurgent de facto leader, and Deputy Prime Minister, Matteo Salvini, fresh off a rousing electoral victory, said he’ll now devote all his energy to changing the European Union’s “old and obsolete rules” and hammered the bloc over the prospect of penalties against Italy. He went so far as to demand for the ECB to fund Italian deficit spending.
It also comes at a time when the future of Italy's coalition government is at stake, with tensions between 5-Star and Salvini's League threatening to collapse the current regime, leading to elections that could see Salvini take unilateral control.
In fact, overnight, Italy's prime minister Conte said he plans to ask Deputy Prime Minister Matteo Salvini for an expression of confidence in order to continue in his position, according to La Stampa.
Conte told people close to him during his trip to Brussels he’ll seek a public show of support from Salvini; "otherwise I’ll tell him I’m not available to remain", which of course would mean new elections and a new, far more eurosceptic government. Indeed, Conte warned that if Salvini wants to take a confrontational stand with Europe, it will be his own responsibility, and Conte won’t take part.
According to many, that's precisely what Salvini wants (read "Europe Is Gunning for Italy, and Italy Is Gunning Right Back") as the simmering war between Italy and Brussels enters its second, and far more violent, round.
What happens next? On Tuesday, Salvini told RTL radio he’s waiting to see whether Brussels proposes a penalty over Italy’s failure to rein in debt.
“Do you think that in a historic moment with youth unemployment at 50% in some Italian regions, when we have to rush to hire doctors and nurses because otherwise the hospitals will be empty, someone in Brussels should -- in the name of rules of the past -- ask us” to pay a fine, Salvini said on RTL.
“All my energies will be devoted to changing these old and obsolete rules,” Salvini said. “If they want to, the leaders can get around a table and in 15 days write new rules putting jobs center-stage, not little numbers -- the new index of well-being must be the unemployment rate.”
“I am going to exchange views with the Italian government on additional measures that might be required in order for them to be compliant with the rules,’’ EU Commissioner for Economic and Financial Affairs Pierre Moscovici said Tuesday at a conference near Lisbon. “It’s quite likely that we will have an exchange of letters,’’ the commissioner said, adding “I’m not favoring sanctions.’’
The Italian government will cite an improved economic outlook, higher tax revenue and spending cuts in its reply to a letter expected later this week, Corriere della Sera reported Tuesday.
One thing is certain: with growing support and increased clout at home following his election win, Salvini, who once called the Italy-Germany bond spread something he had for breakfast, is firmly set on collision course with the the EU.