An Italian crisis would be an “implosion” and have severe consequences for the country’s banking system, the former chief of the Eurogroup told CNBC Friday.
Financial markets have fretted about Italy’s 2019 budget, amid new plans to increase public spending. There are strong concerns that such fiscal plan will derail the reduction of the country’s debt pile — which is the second largest in the euro zone, totaling 2.3 trillion euros ($2.6 trillion).
Speaking with CNBC on Friday, Jeroen Dijsselbloem, the previous head of the group that brings together the 19 euro zone finance ministers, told CNBC that if Italy were to turn into a crisis mode, it would be an “implosion,” given the way that its economy is organized.
“If the Italian crisis would turn into a crisis it will implode in Italy. Because of the Italian banks and the way the economy is organized, it will be an implosion not an explosion,” he said.
In fact, he predicted that a confrontation was on its way.
“It’s pretty worrisome, there’s going to be confrontation and I think the commission has no choice then but to accept that confrontation and to take it,” he said, adding that Europe’s banking authority will have to examine “what this does to the Italian banks.”
Still, Dijsselbloem, who was at the eye of the storm during the Greek crisis a few years ago, said the ongoing tensions around Italy are fundamentally different: “It’s very different and we’re in a different era.”
“The Greek crisis had the huge risk that it would contaminate the rest of the euro zone and create a lot of scare around the euro zone and the euro zone banking system,” he said, explaining that Italy, on the other hand, “finances itself to the large extent.”
The Italian government and the European Commission have been embroiled in a battle of words for the last couple of weeks over the new spending plans. On Thursday, the Brussels-based institution sent a letter to the Italian finance minister, Giovanni Tria, warning him that the 2019 budget draft seemed to point to a “particularly serious non-compliance with the budgetary policy obligations laid down” in European rules.
The problem in the commission’s eyes is not so much the headline deficit of 2.4 percent of gross domestic product, which is actually below the EU’s 2 percent threshold. The more worrisome figure for that office is the structural deficit. The new spending targets point to a structural deterioration of 0.8 percent of GDP in 2019. In contrast, Italy had committed last April to improve its structural deficit by 0.6 percent of GDP next year.
The anti-establishment government in Italy is aiming to support the economy by setting a financial buffer for investments. However, some analysts have raised concerns that the government’s growth forecasts are too optimistic and the extra spending could derail the reduction of public debt.
