Draghi ‘confident’ about a deal on Italian budget

The President of the European Central Bank (ECB), Mario Draghi,. [EPA/Stephanie Lecocq]

European Central Bank President Mario Draghi expressed his confidence on Thursday (25 October) about the likelihood of an agreement between the European Commission and the Italian government over Rome’s spending plan for next year.

Speaking to reporters after the ECB’s governing council meeting, Draghi said that “personally, I am confident that an agreement will be found”.

The Commission took an unprecedented decision on Tuesday to reject the Italian budget, after Rome submitted a draft plan that increased spending above the limits of the Stability and Growth Pact in an “unprecedented” manner, the institution said.

Commission rejects Italian draft budget in unprecedented decision

The European Commission rejected Italy’s 2019 budget in an unprecedented decision on Tuesday (23 October), after the government in Rome failed to give a substantial response to the executive’s allegations of a breach of the EU law.

“In the end, it is just good common sense of what is good for the country, for households and for the people”, Draghi argued to explain his confidence.

Draghi, who had been Italy’s central banker before he arrived in Frankfurt in 2011, rejected the possibility of becoming a mediator in the standoff as this is a “fiscal discussion”.

But in his opening remarks, he left a clear message for Italy.

This period of economic expansion should have been used by highly indebted economies for “rebuilding fiscal buffers”. In addition, “full adherence” to the EU’s fiscal rules is critical for these nations to safeguard “sound fiscal positions”.

In order for Italy to reduce its massive public debt, the EU executive requested the country to adjust its deficit, via new taxes or spending cuts, by around 0.6% of its GDP.

Instead, the populist government led by Five Star Movement and Lega passed an expansionary budget that would boost spending almost 0.9% of GDP and take the deficit to 2.4%, three times higher than the target set by the previous government.

Italy should submit a new budget including the adjustments requested by the EU in three weeks. Otherwise, the Commission would launch an excessive deficit procedure that could ultimately lead to a fine of 0.5% of its GDP.

Commission vice-president for the euro, Valdis Dombrovkis, debriefed the ECB’s governing council on the Italian case.

Draghi said Dombrovskis had told the eurozone central bankers that “we have to observe and apply fiscal rules. But we are also seeking a dialogue”.

Italy’s 'unprecedented' breach of fiscal rules clouds euro summit

Euro-area leaders agreed on Thursday (18 October) to accelerate the work to bolster the monetary union as the European Commission questioned half a dozen member states’ efforts to balance their public accounts, particularly Italy.

The Italian budget was also the topic of a phone conversation on Thursday between Commission President Jean-Claude Juncker and German Chancellor Angela Merkel.

Berlin had expressed its support to the Commission’s enforcement of the EU’s fiscal rules.

So far, Italy’s defiance of EU rules has had a “limited” spillover effect on some “non-core countries”, Draghi observed.

The borrowing costs of countries like Spain and Greece increased over the past days but at a lower level compared to periods of the eurozone crisis.

Brexit

Draghi also expected that “good common sense” would be found in the EU-UK withdrawal negotiations in order to minimise the financial risks.

Brexit was also part of the Juncker -Merkel phone conversation.

However, Draghi warned that if both sides continue to fail in finding a solution as the Brexit date of 29 March approaches, the private sector would have to start preparing under the assumption of a disorderly divorce.

Keep calm and carry on: Brexit is 95% complete, May tells fractious MPs

Theresa May insisted that with ‘95%’ of the Brexit deal concluded it was time to “hold our nerve” through the last weeks of negotiations, as she defended her handling of the Brexit negotiations to MPs on Monday (22 October). 

He said that a ‘hard Brexit’ would cause “big uneasiness” in the financial markets, the central counterparty clearing houses (CCPs), critical in the €660 trillion derivatives market, and other players.

The Italian dispute, Brexit, the ongoing global trade war and market turbulences are part of the increasingly shaky economic and financial context.

“Uncertainties relating to protectionism, vulnerabilities in emerging markets and financial market volatility remain prominent,” Draghi said.

The ECB noted the “weaker momentum” of the eurozone economy. However, the institution did not change its baseline scenario as it does not register a downturn in the euro area output.

ECB sees 'loss of momentum' in eurozone’s economic growth

ECB President Mario Draghi said on Thursday (26 April) that all eurozone countries experienced “some moderation in growth or loss of momentum” over the past weeks, as the institution is carefully reassessing how to exit the unconventional monetary measures adopted during the crisis.

Draghi explained that some of the reasons for the loss of steam were also found in country-specific factors, such as Germany’s car sector or the export performance of some eurozone economies.

In addition, he recalled that the euro area economy grew about its potential last year and the output was returning to its normal level.

But he added that the governing council will reassess the trends in December to see where the European economy is heading.

For the time being, the current assessment led the ECB to keep the key interests rates unchanged. The central bank also maintained its debt-buying programme at the monthly pace of €15 billion until December, as previously announced.

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