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There have been plenty of headlines about Italy these past few weeks, particularly with regard to the Italian government’s 2019 budget.

Some of them were even market-moving, with Italian bonds, European equities, and the euro being particularly sensitive.

But why all the buzz? Why are traders keeping tabs on Italy’s budget? Well, read on and find out.

Why is Italy’s budget under the spotlight?

Well, the simple answer is that Italy’s budget is seen as an economic and political test for the Euro Zone and the E.U. as a whole.

My Quick Primer On Italy’s Political Situation is still relevant for understanding the importance of the budget, so go ahead and read up on that if you need some of the details.

The short of it, though, is that the E.U. wants Italy to accept austerity measures (i.e. by reducing the budget deficit).

However, the 5-Star Movement and the League, the two members of the ruling coalition government, have expressed in their joint manifesto that they want to increase spending and reduce taxes.

Moreover, the two parties also expressed in their joint manifesto that they want the E.U.’s governance and fiscal rules to be reviewed, which implied that the coalition government is not too keen to follow the E.U.’s budget rules.

And flouting the E.U.’s budget rules would be seen as a fracture on the E.U.’s political integrity.

In other words, it would create fears of an Italian version of Brexit. And all the more so, given that both the 5-Star Movement and the League are anti-establishment parties that have expressed euroskeptic positions in the recent past.

And that’s why Italy’s budget is seen as a political test for the E.U.

As to why Italy’s budget is also important from an economic standpoint, well, Italy is the third largest economy in the Euro Zone but Italy’s debt-to-GDP ratio is 131.8%, according to Istat’s latest Annual Report, which is the second highest in the Euro Zone. Only Greece’s debt-to-GDP ratio is higher at 178.6%.

But in terms of actual amount, Italy’s debt is to the tune of around €2.4 TRILLION, which is the largest in the whole of the Euro Zone. In contrast, Greece’s debt only amounts to around €328 billion.

Basically, if Greece’s debt crisis made investors jittery, then a potential Italian debt crisis would be an even bigger source of concern. Much bigger. And fears of a potential Italian debt crisis will likely flare up if Italy violates the E.U.’s budget rules.

What do the E.U.’s budget rules say?

The Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (TSCG) is the international treaty that defines the budget rules for Member States in the E.U. (except the U.K. and the Czech Republic).

And the treaty provides that the annual government budget deficit of Member States must not exceed 3.0% of GDP. And if the debt-to-GDP ratio of a Member State exceeds 60% (Italy’s debt-to-GDP ratio is 131.8%), then that Member State is required to accept austerity and work to have a budget deficit of only 0.5%.

Italy’s previous government has been trying to comply with the E.U.’s budget rules.

And the current budget plan, which comes from the previous government, is to slash the budget deficit to just 0.8% of GDP in 2019, down from this year’s target of 1.6%.

What do we know about Italy’s plans?

Both the 5-Star Movement and the League have made it clear that the 2019 budget deficit will exceed the previous government’s 0.8% target.

However, we don’t know by how much, or if the budget will exceed the E.U.’s 3.0% limit.

Both the League and the 5-Star Movement have recently vowed to respect the E.U.’s budget rules. And if they’re true to their word, then the 2019 budget deficit probably won’t exceed 3.0%.

We do know, though, that the League’s Matteo Salvini is adamant that the party’s promises be partly implemented by next year when he said that:

“The (2019) budget will not include all planned measures immediately, but there will the first steps towards a flat tax and a radical overhaul of the pensions system.”

We also know that Luigi Di Maio of the 5-Star Movement is equally adamant that the party’s income plan be also implemented when he said that:

“I expect the economy minister of a government for change to find the money for Italians who are momentarily in economic difficulty.”

Speaking of the economy minister, a Sept. 17 report from Corriere Della Sera said that Italian Economy Minister Giovanni Tria is determined to keep the budget deficit within 1.6% of GDP, which is double the previous government’s target, but is at least within the E.U.’s 3.0% limit.

The 5-Star Movement  and the League are probably asking for more. We know, for instance, that Salvini was pushing for a 2% budget deficit earlier this month. And unnamed sources from the League and the 5-Star Movement even claim that the parties want as much as 2.5%.

Are there any key dates to keep in mind?

Here are the key dates. September 27 would probably be the most critical, unless details of the government’s plans are leaked or officially revealed before then.

  • Sept. 27 – Italy will release its Economic and Financial Document, which will reveal the government’s economic and fiscal targets
  • Oct. 15 – Deadline for Italy to present its draft of the 2019 budget to the European Commission for approval
  • Oct. 20 – If the European Commission approves the draft, then the draft will be presented to the Italian Parliament for approval