ECB warns against Italy's big-spending plans

The European Central Bank said Thursday that Italy should stick to EU budget rules rather than pump up spending, warning that financial markets could punish the country's new government for recklessness. "A loosening of the fiscal stance in high-debt countries could impact the fiscal outlook and, by extension, market sentiment" towards governments when they try to sell bonds, the ECB said in its biannual financial stability report.
Departing central bank Vice-President Vitor Constancio was more explicit, telling reporters "Italy should keep within the European rules regarding fiscal policy" because "it's in its own interest", according to Bloomberg News. Italy is the third-largest economy in the eurozone and labours under a 2.3-trillion-euro ($2.7-trillion) government debt burden, 132 percent of its annual economic output.
That ratio is the highest of any EU nation aside from Greece, and more than double the official EU limit of 60 percent. The country must turn to investors to refinance hundreds of billions of euros of its debt in the coming years, and could be forced to pay higher interest rates if markets are not convinced it has sound finances.
But a coalition deal between the anti-establishment populist Five Star Movement and eurosceptic League parties could see the budget deficit - the amount the government outspends its income - surge as it promises tax cuts, a monthly basic income and rollbacks to money-saving pension reforms. For now, EU Economic Affairs Commissioner Pierre Moscovici saw Thursday a "fairly good sign" in Italian prime ministerial nominee Giuseppe Conte's openness to "dialogue" with the bloc's executive arm.
"I continue to believe Italy will remain a core country of the eurozone," he added. Looking at the 19-nation eurozone more broadly, minutes from the ECB's April meeting released Thursday showed governors were convinced slower economic performance at the start of the year was temporary. "The underlying growth momentum was on the whole assessed to remain intact," the minutes read.
But "uncertainty surrounding the outlook had increased," policymakers agreed, concerns reflected by President Mario Draghi when he announced the ECB would stick to its mass bond-buying (QE) and low interest rate policies. "Risks relating to global factors, including the risks of protectionism, have become more prominent," Draghi said in late April in a nod to the rising risk of trade conflict between the EU and US President Donald Trump's administration.