On the Margin: Italy's October Surprise is Here

The EU has signaled it will push back against Italy’s budget with a forecasted 2.4% deficit as a share of GDP. Press reports exaggerate the toughness of Brussels’ response, but the Italian government has hit back hard at even that. Borghi has raised the specter of Italian having its “own currency,” but later walked it back. As an official matter, a 2.4% budget is compliant with the Stability and Growth Pact, so we expect that it, or something close to it, will end up being negotiated mid-month after Brussels gives its formal response. Having not seen the details, we have no judgement as to whether Borghi is right in characterizing the deficit as necessary for growth. The biggest risk remains a market-driven run on the euro that gets ahead of actual events. Italy is aware of that risk, and is using it as a negotiating weapon.