Radio Sputnik discussed the EU pressure on Italy with Lorenzo Codogno, visiting the professor in practice at the European Institute of the London School of Economics and Political Science, former chief economist and director general at the Treasury Department of the Italian Ministry of Economy and Finance.
Sputnik: What is your take on the pressure on Italy over the budget?
Prof. Lorenzo Codogno: The European Commission has effectively no choice but to follow the rules and to follow what the fiscal framework in Europe is suggesting. The budget that the Italian government presented is so far away from the direction that is set according to the rules that indeed it becomes almost a done deal that in general finance ministers in Europe will decide to put Italy into excessive deficit procedure.
Sputnik: What is the political situation right now in Italy? There is a populist government which obviously got elected on promises to increase spending and certainly not promises of austerity. How much pressure is there on the government right now to pursue that course despite any implications that it could have for Brussels-Rome relations or in the way of sanctions.
Prof. Lorenzo Codogno: I think at the moment they don't care much about the European fiscal framework. Indeed, they played that card in their advantage, in other words, they will probably run a political campaign ahead of European elections on an anti-European ticket, so to speak. So, I think this whole story against the fiscal rules and against Europe is actually playing in their favour in the sense that they are using this whole issue in order to take advantage politically and to try to gain in electoral terms.
READ MORE: Italy is Part of NATO, But Russia is Not an Enemy — Italian MP
First, because the Italian government will be focusing on the European elections, and then secondly, the Commission will try to keep a low-profile, and as you know after the European elections it will take several months for the new Commission to be fully operational. So, I think the whole issue will stay on hold for a long while from now on.
Sputnik: Do you think there is a lot of criticism within Italy of the budget or is it actually very popular right now?
So, my guess is that it will be increasingly difficult for this government to deliver on the promises. And it would be increasingly risky from the point of view of financial markets. So, my guess is that between now and May, probably, the government will survive, and then we will see, because it will depend on the election outcome.
Sputnik: Can you comment on the effects on investor sentiment from the stance of Brussels, where they are already talking about putting a lot of pressure on Italy to revise the budget and they are talking about possible sanctions. How does that affect the markets?
Prof. Lorenzo Codogno: I think the row between Rome and Brussels is, to some extent, fully discounted by now. I mean Brussels is just a way to kind of assess the fiscal situation and the position of Italy in terms of fiscal variables. But at the end of the day, I think what really counts is not what Brussels says, but what investors perceive. The investors clearly look at the assessment by Brussels as a reference point for where the situation is.
READ MORE: Italy's Budget Deficit Issue 'Has Never Been as Serious as It is Now' — Prof
So, I think, again, the decision by the Commission to recommend excessive deficit procedure is already on the table now. I think it is almost a done deal, the finance ministers will decide to go ahead. By now, the financial markets are fully pricing in this development. So, I don't think there will be any further market impact.
Sputnik: Bottom line: do you think a compromise is likely to be reached and to what extent is the threat of sanctions a deterrent to the current government?
Ideally, either this government or new government will start behaving in a more responsible way following the recommendation by Brussels. And then the situation will gradually improve. Sanctions won't happen before at least one year, because Italy will be given at least one year to probably adjust its accounts. So we are talking about again late 2019 or early 2020.
READ MORE: Rome Will Not Surrender to Brussels' Dictate in Budget Row — Lega Party
And only at that time, probably will sanctions be considered. The sanctions have never been applied in Europe so far. I think it would be a very harsh decision to go along these lines; before that I think a lot of negotiations and discussions will take place.
The views expressed in this article are solely those of Lorenzo Codogno and do not necessarily reflect the official position of Sputnik.