Italy’s populist coalition government sparked outrage in the European Union after proposing a budget deficit of 2.4 percent – a figure almost three times the previous administration’s target.
The EU subsequently rejected the proposal and ordered Italy to amend it within three weeks or face possible sanctions for breaching Eurozone rules.
Lorenzo Codogno, former chief economist and director general at the Italian Treasury Department, has consequently warned that Italy risks catalysing a further finance crisis if it fails to amend its “expansionary” budget to a more conservative model.
He said: “In recent weeks, the worst fears have materialised, and the risk of another crisis has become much higher.
In recent weeks, the worst fears have materialised, and the risk of another crisis has become much higher
“I could even argue that Italy is already in a crisis.
“Once credit data for September and October are out, we will see that a credit crunch has already started, while a capital outflow is already in full swing.”
The former official also noted that interests rates may be forced up in response to Italy’s refusal to amend the budget, further deepening the crisis.
He said: “What is going to be the end game? The “Lords of the spread”, notably financial markets according to Salvini’s definition, may well drive interest rates higher, sooner rather than later, and this would escalate the crisis.”
Matteo Salvini has refused to alter Italy’s anti-austerity budget despite EU criticism (Image: GETTY)
Pierre Moscovici warned that Italy’s budget risked hurting its own people (Image: GETTY)
In response to growing international concern surrounding the budget, Mr Codogno called on the European Commission to launch an excessive debt procedure (EDP) against Italy.
EDP is typically imposed on EU member states that exceed the budget deficit ceilings as imposed by the EU’s stability and growth pact.
The procedure involves numerous steps, and many culminate in stringent sanctions being imposed on the country.
Commenting on the measure, the economics expert said: “The sooner Italy enters EDP the better.
Pierre Moscovici met Italy’s Finance Minister Giovanni Tria in Rome (Image: GETTY)
“Once in EDP by spring next year, Italy will likely be permitted to overshoot to 2.4 percent deficit in 2019.
“But it will have to change tack and introduce credible adjustment plans for the following years, which will tend to reassure financial markets.”
He nevertheless warned that “credibility” and trust in the Italian economy would be difficult to regain following the “big mess” of the current proposed budget.
He added that while the economic outlook of Italy will deteriorate regardless, the country will likely avoid a “full-blown crisis” if it enters EDP.
Mr Codogno said: “In EDP, Italy will muddle through, as other countries have done, but it will probably avoid a full-blown crisis.
“It would be a scenario in which the situation gets worse before it gets better, but eventually it will indeed gradually improve.”
Italy’s budget proposal has also drawn sharp criticism from leading EU officials, with EU Financial Affairs Commissioner Pierre Moscovici warning that the budget would hurt Italians in the long run.
He said: “Italy must continue its effort to lower its debt because it is the enemy of the economy.”
Matteo Salvini said Italy is ‘not changing a comma of the budget’ (Image: GETTY)
EU criticism has nevertheless been rejected by the Italian government, who have vowed to stick with their key campaign promises, including tax cuts and a basic income for the poor.
Matteo Salvini, deputy prime minister and leader of the far-right League party, said: “We are not changing a comma of the budget.
“If Brussels or some big professors want Italy at zero growth, they have run into the wrong government and the wrong minister.”