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LGT Navigator: EU to initiate deficit proceedings against Italy

June 6, 2019

The EU Commission wants to initiate proceedings against Italy because of its escalating deficit. In view of the already fragile situation on capital markets, a loss of confidence could cause serious troubles for Italy and the Eurozone.


According to the Brussels executive, the Italian government coalition did not take sufficient countermeasures in 2018 to curb the government deficit. Italy's debt ratio of 132% is the second highest in the EU – after Greece – and the debt burden amounts to around EUR 2.3 trillion. According to EU Finance Commissioner Valdis Dombrovskis, it is to be expected that the Italian debt ratio will continue to rise this and next year, as the currently divided coalition of populist Five-Star Movement and right-wing Lega wants to deliver expensive election promises. This makes Italy the first EU country to threaten such proceedings. The EU states now have two weeks to review the EU Commission's assessment, after which disciplinary proceedings against Italy would be officially initiated. Against the background of an already fragile situation on financial markets, a loss of confidence could drive up the cost of Italy's debt further and cause serious financing problems for the third-largest economy in the Eurozone. Italy's leading index, the FTSE MIB, traded lower during yesterday's session in the midst of a Europe-wide friendly overall market, but still managed to close with a moderate daily gain, while the yield on ten-year Italian government bonds temporarily climbed over 2.6%.

Fiat Chrysler withdraws offer for Renault

Fiat Chrysler has withdrawn its billion-dollar takeover bid for French rival Renault. According to Fiat, the background is the resistance of the French government, which holds a 15% stake in Renault. Paris wanted to delay the merger in order to involve the Japanese Renault partner Nissan in the negotiations. The mega merger would have created the world's third largest carmaker. The two European car manufacturers, particularly Fiat, are under pressure to meet the costs of the transition to mobility providers.

Disappointing US economic data fuel rate cut expectations

Job growth in the US private sector remained well below expectations in May, according to the labor market service provider ADP. With 27,000 new jobs created, employment growth clearly lagged behind the average of 185,000 jobs forecast by analysts and was thus the weakest increase since March 2010. The ADP report is regarded as an indication of the official labor market report from Washington due on Friday. If the weak job growth is confirmed, expectations on capital markets with regard to interest rate cuts by the Fed in the near future are likely to increase again significantly. At the same time, the purchasing managers' index calculated by IHS Markit for the overall US economy confirmed a weaker trend. As in Europe, this is mainly due to the weakness in the industrial sector, while service companies are still on a solid growth path. This was confirmed by the latest survey results of the purchasing managers' association ISM. The non-manufacturing PMI rose to 56.9 in May from 55.5 points in the previous month.

Short-term prospects for China's economy remain uncertain

In view of the ongoing and recently escalated trade dispute between the US and China, the International Monetary Fund (IMF) was forced to slightly lower its growth forecast for the People's Republic of China. In the current year, the Washington-based organization expects the world's second-largest economy to grow by 6.2%, compared with the previous forecast of 6.3%. The IMF also anticipates an economic slowdown and GDP growth of +6.0% in each of the subsequent years 2020 and 2021. Against the background of a possible further escalation of the trade war, the short-term prospects for China's economy in particular remain uncertain, according to the IMF.

Economic Indicators June 6

MEZ Country Indicator Last
08:00 GE Factory Orders (y/y) -6.0%
11:00 EZ GDP (q/q) +0.4%
13:45 EZ ECB monetary policy decision -0.4%
14:30 US Trade Balance -USD 50bn
14:30 US Productivity (non-farm, q/q) 3.6%
14:30 US Initial Jobless Claims (weekly) 215,000

Earnings Calendar June 18

Country Corporate Period
US Oracle Q4



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