The caution comes as the European Commission reaches out to Italy on its budget crisis in a move to smooth over animosity between Rome and Brussels over the country’s draft 2019 budget.
Bruno Le Maire, French finance minister, said the European Commission does not expect to see any contagion of Italy’s budget crisis across Europe but the incident has raised the alarm over Europe’s ability to respond to major financial turmoil if the system unravels.
Mr Le Maire told Le Parisien that the commission had to “reach out to Italy” after rejecting the country’s draft 2019 budget earlier this week for breaking EU rules on public spending and asking Rome to submit a new one within three weeks or face disciplinary action.
He said: “We do not see any contagion in Europe. The European Commission has reached out to Italy, I hope Italy will seize the hand.”
The Italian government received a backlash from the EU after proposing a budget deficit of 2.4 percent – almost three times higher than the previous administration’s target.
Brussels’ soft line approach towards Italy is to avoid making Europe look like “an illegitimate body: the Brussels bureaucracy bunker against the Italian people”, Pierre Moscovici, the European commissioner for economic and financial affairs told Financial News.
However, Mr Le Maire said an “urgent” response was needed to Italy’s plight to protect banking and safeguard the Eurozone investment budget.
He added: “But is the eurozone sufficiently armed to face a new economic or financial crisis? My answer is no. It is urgent to do what we have proposed to our partners in order to have a solid banking union and a euro zone investment budget.”
Eurozone officials have said that Rome’s unprecedented standoff with Brussels seems certain to delay the reform process and probably dilute it for good.
Mr Le Maire also said French banks with branches in Italy had issued corporate and household loans totalling €280 (£249bn) billion euros, noting that “this sum is manageable but substantial”.
Express.co.uk previously reported that if Italy fails to reduce its large budget it risks kickstarting a further financial crisis.
Lorenzo Codogno, former chief economist and director general at the Italian Treasury Department, said that Italy’s economic downfall could catalyse another “much higher” crisis throughout Europe, arguing that credit data for September and October will show that a ‘crunch’ has already started.
Earlier this month credit ratings agency Moody’s published an assessment of Europe’s economy claiming that a series of vulnerability including higher debt levels, peaking asset prices and regulatory risks could deepen the impact of another credit fall.
Paolo Leschiutta, senior vice president at Moody’s, said: “Overall, the amount of wiggle room available to mitigate the impact of another downturn is shrinking.”