Kristian Rouz —Economists across the EU are sounding an alarm over Italy's rising debt burden, which could potentially trigger yet another debt crisis in the single currency area.
Italy's budget problems have been exacerbated over the past 18 month as the government in Rome has been gradually increasing its spending amid a lengthy political struggle, the ongoing influx of African migrants, and structural setbacks in the national economy.
A recent report from the European Commission found that Italy's budget had deviated from Brussels' joint budget rules that mandate budget deficits should be below 3 percent of each member-state's GDP, while total debt burden should not exceed 60 percent of the GDP. However, Italy's debt-to-GDP ratio has ballooned to over 130 percent.
This comes after Italy's government announced its budget for the next fiscal year, with a projected deficit of 2.4 percent of GDP — exceeding that of the previous budget threefold.
The Commission gave Rome until this coming Monday to provide an explanation for its fiscal policies.
"The general tone of the letter sent by the EC sounds tougher than what we had anticipated," Fabio Fois of the British bank Barclays Plc said.
Barclays' analysts also said the EU is likely to make a substantial effort to bring Italy in line with the Eurozone's fiscal rules in the coming weeks. It appears that Brussels has become increasingly anxious about fiscal deficits across the single currency area in the face of looming Brexit.
Additionally, officials from Germany and France have been pushing for a fiscal union within the Eurozone over the past few month. However, such a union would require a higher degree of uniformity in Eurozone member states' fiscal policies in order to succeed.
Meanwhile, market participants say the recent euro devaluation against the pound sterling could be connected to Italy's budget woes.
"It could be a matter of time before the euro falls through the bottom of its range after the EU signalled a thumbs-down to Rome's budget for the coming year," Joe Manimbo of Western Union said.
Italy is the Eurozone's third-largest economy, and its budget problems are felt across the bloc to a far greater extent than, for example, the debt problems in Greece back in 2015.
However, economists also say the EU debt crisis of the early 2010s started over fiscal problems in several member-states at once — Portugal, Ireland, Greece, and Spain. Even a default on Italy's debt alone might not be enough to capsize the entire Eurozone — but coupled with a possible ‘no-deal' Brexit, Italy's brewing crisis could deal significant damage to the euro area.
"The combination of the tax-cutting right-wing populists and happy-to-spend left-wing populists in Rome has provided Italian bonds with a momentum that very much reminds of 2011," Ulrich Leuchtmann of Commerzbank said.
However, the Italian government said its fiscal policies would boost economic growth in the country, while the nation's debt-to-GDP ratio would remain at 130 percent.
Additionally, Italian right-wing parties League of the North and Five Star Movement said expansionary fiscal policies mark a pivot to supply-side economics in Italy — which would reinvigorate the nation's manufacturing, agriculture, and encourage exports.
But Moody's analysts disagree.
"That makes Italy vulnerable to future domestic or externally-sourced shocks, in particular to weaker economic growth," they said in a statement.
The European Commission is now expecting a more in-depth review of the Italian budget for next year, with officials saying Rome must make a solid case for its rising fiscal deficits.