Euro Pressured on Threat of Massive Italian Spend

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Market Drivers August 20, 2018
Euro Pressured on Italian Spend threat
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It’s been a quiet start to trade on Monday but euro has been notably weaker as fallout from last week’s collapse of Genoa bridge is exerting both a political and economic cost.

The tragedy of last week’s Genoa’s Morandi bridge which has resulted in more than 40 fatalities so far, has suddenly brought focus to Italy’s crumbling infrastructure. The bridge has been a constant patchwork of repairs over the past few decades as its outdated design may have hidden massive corrosion within its posts.

In response to the public outrage over the event, Italy’s 5 star party is proposing a massive 80 Billion euro budget spend to upgrade the country’s infrastructure. Such a huge increase in spending would massively violate the union’s budget rules, but Italy’s ruling party seeks to invoke the ‘Golden Rule’ championed by Britain’s Gordon Brown to remove chunks of public investment from the headline budget deficit.

Although such a huge increase in spending would certainly be met with opposition from other EU members, the Italian officials may have the political will behind them to ignore the objections from other EU members. At very minimum, the EU may grant Italy a compromise multi-billion carve out for infrastructure needs because of the country’s central position within the European Union. Italy presents a very delicate case for the EU because it is the fourth largest economy within the union but also the most indebted. In addition, it is also one of the slowest growing economies in the region growing by less than 0.5%/year for the past 5 years.

Assuming the infrastructure spending would be used for real upgrades of capital structures rather than mere corruption, the program could actually prove positive for both Italian and broader EU growth as it would juice up the sclerotic economy. For now, however, the markets remain wary especially given Italy’s precarious financial condition and especially given ECB’s desire to normalize policy sooner rather than later, which would put further upward pressure on Italian rates making debt service even more challenging.

The euro has withstood several attempts to breach the 1.1400 level so far but remains vulnerable to further downward pressure as the day proceeds.

Boris Schlossberg
Managing Director

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