The Italian economy continues to disappoint

As we've mentioned many times, Italy’s main issue is related to the lack of growth, which obviously complicates the budget equation.  We are sceptical regarding the impact on productivity and investment of the proposed measures of the coalition. That being said, we won’t expect a “hot autumn” for Italy. S&P's rating review last Friday (outlook was lowered to negative, but the rating was unchanged at two notches above junk) was considered as rather positive by the market. 

The risk of an escalation in tensions between Rome and Brussels is limited. It seems more and more obvious that Italy will slightly lower its overoptimistic growth forecasts and proposes a mechanism to avoid pushing the deficit beyond the permitted limits.

It is in the interest of the European Commission and Italy to find a middle ground. Italy still has a few weeks left to offer some input or modifications before Brussels issues its formal opinion, which is due on November 30.

An agreement is necessary because first, Italy needs very favourable market conditions to face the massive maturity wall that will reach about €300bn in refinancing in 2019 and second, the European Commission cannot countenance a political crisis with a member state that would fuel populist movements ahead of the European Parliament elections next May.