Italy’s Deputy Prime Minister Matteo Salvini admitted that the country could have to pay a hefty fine of €3 billion. The European Commission might resort to this measure because Italy’s government does not comply with the EU budget requirements which restrict the level of a public debt. Apart from the heavy fine, the EU authorities could request Italy to raise taxes from September 2019 aiming to generate €20 billion. Experts say that Rome’s failure to cap the level of the state debt forced the European Commission into this tough measure. At present, Italy’s public debt totals nearly 132% of its gross domestic product. Such an elevated level would cause troubles in case the central bank dares to raise interest rates.
Besides, Italy’s government is facing a challenge of tackling budget deficit. Rome was keen to urge the EU authorities to approve it at 2.4% of GDP for this year. However, Rome had to obey the directive from the European Commission and nailed down the deficit level at 2.04%. Brussels predicts that Italy’s budget deficit could swell to 3.5% of its GDP that is likely to spark off a conflict between Italy and the EU authorities. A lot of analysts do not agree with Brussels’ decision to penalize the country which is going through financial troubles. Indeed, Italy’s government will have to pay the fine at the expense of the state budget. Alternatively, it could search for money in the debt market that will make things worse.
Meanwhile, yields of Italy’s government bonds benefited from the recent developments. The yield curve climbed sharply. On the flip side, Italy’s stocks slumped over 1%, thus pushing other European stock markets down. Yields of Italy’s government bonds jumped 7-10 basis points. Yields of the benchmark 10-year bonds hit a one-week high of 2.726%, having recorded the strongest two-day rally since early January of this year.