The European Commission is ultimately responsible for ensuring that member states abide by the agreements that the bloc has taken. A key accord for members of the Eurozone is that the deficit that each state runs should not exceed 3% of its GDP, although this requirement was waived in the aftermath of the Global Financial Crisis. The debt crisis in Greece was ultimately caused by the Greek government fibbing about the state of the nation’s finances in order to meet the convergence criteria for the Euro at its outset. When the Global Financial Crisis hit, this fact became known, markets lost confidence in Greece’s ability to honour its debt obligation which pushed up its borrowing costs to unsustainable levels, requiring that the Eurozone and IMF provided it with a series of bailouts to keep the nation from bankruptcy. On the back of the Greek sovereign debt and Global Financial Crisis, with Portugal, Spain and Ireland in significant trouble, markets worried about the viability of the Euro, triggering a European Sovereign Debt Crisis which, in the end, was settled politically and with the European Central Bank being able to guarantee funding to any (qualifying) member state in difficulty. So, having successfully fought these economic fires and with the economic uncertainty of Brexit looming large, the EU is not keen to have to deal with any further problems just now.
The populist Italian government has published a budget which would green light a deficit of 2.4% of GDP (well within the permitted level) and engage on significant public spending which will boost Italy’s public debt still further – it is second only to that of Greece as a proportion of GDP. This has caused alarm bells to ring in Brussels.
Earlier this week, Jean-Claude Juncker suggested that the Italian plans could pose a threat to the Euro. Juncker commented: “Italy is distancing itself from the budgetary targets we have jointly agreed at EU level. I would not wish that, after having really been able to cope with the Greek crisis, we’ll end up in the same crisis in Italy.”
Uncertainties caused by the move have led to a sell-off of Italian sovereign bonds, pushing up interest rates on the bond market.