Euro May Fall as EU, Italy Budget Battle Heats Up


  • European Commission may push back against Italy on budget
  • EDP trigger likely to stoke uncertainty, weighing on the Euro
  • G10 currencies in corrective mode after sweeping risk aversion

European politics are back in focus for currency markets, with Italy now in the spotlight. The European Commission will report on the country’s budget, which it has said breaches the regional bloc’s fiscal rules. For its part, Rome has balked at amending its position.

This puts Brussels in a difficult position. A tough punitive stance is likely to be spun as evidence of supranational overreach and used as fodder to support the very same type of anti-establishment politicians now in power in Italy. Looking the other way might embolden others to break the rules however.

Taking the unprecedented step of activating the Excessive Deficit Procedure (EDP) may be next. That would put Italy on notice and hit it with a fine of 0.2 percent of GDP. The money may be treated as a deposit and returned if Rome cleans up its act within 3-6 months. Otherwise, escalation would follow.

Since no

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