Winter has arrived for the eurozone economy. Fresh forecasts from the European Commission on Thursday will confirm the single currency area is in the throes of a slowdown, forcing Brussels to lower growth across the bloc.
The headline GDP downgrades won’t be spectacular. But as always in the eurozone, it’s the details that matter.
Italy — the bloc’s problem child economy — will be the one to watch. Since the last round of EU forecasts in November, Rome’s populist government have convinced the commission they will rein and delay their most radical spending plans to keep the country’s budget deficit in check.
In December, the Italians promised to dial down its draft budget plan so the deficit will rise to 2.04 per cent rather than an initial rules-busting 2.4 per cent. Brussels duly backed off from opening an excessive deficit procedure that could have resulted in financial sanctions.
The rapprochement was underpinned by hopes the Italian economy can keep growing at a steady, if modest, clip to keep the public finances in check. Hard data since shows those hopes were tenuous at best.
Italy fell into recession for the first time in five years at the end of 2018. Business surveys at the start of the year aren’t encouraging. The commission’s forecasts — which were already more pessimistic than Rome's rosier projections — will show a further deterioration in growth on Thursday.
The downgrades will embolden hawks in the eurozone's Hanseatic capitals who have questioned the commission's rationale for backing down and believing Rome's fantasy figures.
Weaker growth automatically translates to a higher deficit. Economists at Société Générale think Italian GDP will slump to as low as 0.5 per cent this year — pushing the deficit closer to 2.7 per cent. In the commission's November forecast, GDP growth was pencilled in at 1.2 per cent. The government had projected 1.5 per cent.
So what’s to blame? Italy is suffering as the broader eurozone economy cools. But Rome’s populists are pointing the finger at the last government for policies that are hurting the economy. For finance minister Giovanni Tria, the slump is further evidence that Italy needs exactly the kind of reflationary stimulus — via spending and tax cuts — that his government has promised.
In Brussels, blame is privately pointed at Matteo Salvini for provoking a stand-off over his budget that spooked bondholders and raised the country's debt costs. That has placed a strain on Italy’s financial conditions if not leading to a full blown debt sell-off.
Officials privately remark that the Italian case resembles a “contractionary fiscal expansion” — where the positive stimulus from spending is outweighed by the adverse impact on the economy through higher debt costs. It's a theory that was presciently forecast by Olivier Blanchard late last year and has sympathisers in Brussels.
If borne out, it will show that despite Brussels choosing to back down over Rome’s budget, damage to the Italian economy may already have been done.
Chart du jour: Poles apart
Poland’s ruling Law and Justice party is splurging on welfare ahead of elections next year. Monika Pronczuk reports how the measures are leading to fears that more and more mothers will drop out of the labour market (chart above).
Donald Tusk is the only man plastered all over UK newspapers and television news this morning for his comment about the Brexiters' inferno (below). His team subsequently tried to clarify saying they were “a genuine expression of his deep frustration” (Politico).
It doesn’t seem to have mattered much in the UK. Sammy Wilson, DUP MP, slammed Mr Tusk for being a “devillish euro maniac”. John Longworth, former head of the Chamber of Commerce, calls the Pole “a self-styled satan” in The Telegraph. The New Stateman’s John Elledge thinks the Brits are in an abusive relationship with the EU — but it’s the UK that’s the real abuser.
The FT reports from a confidential meeting between the Department of Trade who have told UK business there is no guarantee they will be covered by the EU’s vast network of trade deals — even if there’s a Brexit deal in March.
Just trust us
With Theresa May in Brussels on Thursday looking for “alternative arrangements” Alan Beattie explores whether her “trusted trader” plan to avoid a backstop for Ireland can really work. (FT)
Vestager's reluctant no
“It's fine to be big, that’s not the issue here” the EU’s competition chief insisted as she announced the blocking of a merger between Siemens and Alstom that was backed by Paris and Berlin. Margrethe Vestager repeated that Brussels’ competition rule “keeps our companies on their toes”. “Europe will still have two, rather than one, global champion”, she said. (FT, Politico)
Germany’s Federal Cartel office this morning releases a long-awaited verdict on whether Facebook is abusing its market dominance to collect data on users without their consent. The FT explains why it is being closely watched in the tech industry, which is worried about digital-era competition rules.
EU embassies in Brussels are being “captured” by big business according to a new report on lobbying from the Corporate Europe Observatory:
“It’s time that member state governments stopped offering privileged access to business elites, and instead provided citizens with information and a clear voice on EU matters.”
The man who provoked a constitutional crisis in Rome is heading out of the Italian government. Ansa reports Paolo Savona — whose view on the euro meant he was barred from becoming finance chief last year — is off to Consob, Italy’s securities regulator.
The endgame might be approaching for the EU’s vexed copyright directive. EU ambassadors will meet late on Friday for last-ditch negotiations that could pave the way for a final deal with MEPs next week. In anticipation, Google has stepped up its lobbying against the directive in a blog post warning policymakers to “fix” the text.
Coming up on Thursday
Theresa May is in Brussels to see Jean-Claude Juncker, Donald Tusk, Antonio Tajani and Guy Verhofstadt. The commission releases its winter interim GDP and inflation forecasts for the eurozone at 11am (CET).
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