How the French Protests are Helping the Italians

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With all the latest headlines focusing on the tribulations of Brexit and the protests in France, Italy has sort of fallen off the radar. But that doesn’t mean things aren’t happening. In fact, what is going on could have a few financial implications. 

Later today, the President of the European Commission, Jean-Claude Juncker (not to be confused with the President of the European Council, Donald Tusk), fresh off of telling Theresa May there is nothing more to negotiate, will meet with Italian Prime Minister Giuseppe Conte to discuss the budget.

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Nothing terribly shocking is expected to come of it, but it’s a good opportunity to check in on the Italians and their neverending budgetary problems, and see how the situation in France – or at least, Macron’s concessions to the protestors – is actually helping to bolster their position.

Converging on a number 

Initially, Italy proposed a budget that would generate a deficit to GDP ratio of 2.4%. Since then, and after considerable wrangling, different Italian officials have offered to lower it slightly to meet EU demands. Salvini over the weekend referenced 2.2%, and on Monday press reported that the EU wouldn’t discipline the country if the deficit was cut to 2.0%.

But before going to the meeting with Juncker, Conte was reported as looking for a ratio for between 2.05-2.08%. His position domestically is strengthened by the confidence vote held on the 7th which approved the budget as is. Yesterday, it was reported that the EU was seeking a €12B cut in the budget that was approved by the lower house.

We should stress that while there have been press reports, with either side not taking an official public stance – it’s not unusual for the subjects to come out and refute press reports a few days later. Budget discussions were only supposed to “start” today, suggesting that even though both sides are rumored to be considering a fairly close number, there is still plenty of jockeying to be done.

So how is Macron mixed up in this?

In dealing with the Gilets Jaunes protests that have been gripping France for quite a while, Macron has made a series of concessions, including raising the minimum wage and rescinding taxes on pensions (to little avail, apparently, as the protests continue). According to preliminary analysis, this would push France’s debt/GDP ratio up to 3.5%, well above the 2.4% that the controversial Italian budget initially implied.

The long-standing argument of the Italians is that other countries routinely get passes on budget deficits, citing France as an example, so Italy deserves the same treatment.

With Macron expected to take the lead on the EU side of fiscal restraint, it will be a lot harder for him to make the case when his own country’s deficit is higher than Italy’s. Likely, this will embolden Salvini and Di Maio, who had signaled recently the potential for some degree of concession on the budget towards Brussels, but he might pull that back.

Popularity vs. Eurocrats

The other way that what’s going on in France to implicate budgetary discussions with Italy (and subsequently other countries) is that the relative success of the Gilets Jaunes protests in getting concessions from the government might embolden other populist movements in other countries. 

Increased pressure from the EU to get budgets in line might falter in the face of growing popular unrest, which manifested itself electorally in Italy and Germany most recently and is now boiling over into the streets of France. Periphery nations leaders might be wary about doing something that would spark similar protests in their own countries, and the European Parliament elections are approaching in May.

European leaders are scheduled to meet on Thursday and Friday, which is likely too soon to express an opinion on Macron’s new budget. And they’re going to be more preoccupied with Brexit, anyway.

The League and M5S are already studying how to get the most out of the budget disagreement, planning to run a campaign around a battle between national sovereignty and bossy eurocrats who treat Italy unfairly. Prolonging the impasse might upset markets, but politicians always care more about votes.

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