A Transmission Belt of German Supremacy

ROME/BERLIN (Own report) - German politicians and media are intensifying pressure on Rome in anticipation of today's EU Commission verdict on Italy's national budget. Already last week, EU Budget Commissioner Günther Oettinger announced, in reference to the Italian deficit, that the Italian government must "correct" its draft budget. Media reports refer to a "black week" for Rome. Negative reporting - like rating agencies' devaluation of Italy's creditworthiness - can contribute to the destabilization of Italy's financial and credit markets. The country's current downward spiral threatens to re-escalate the banking crisis. Whereas Berlin insists that the EU take sharp measures against deficits, Germany's Finance Minister at the time, Wolfgang Schäuble had prevented the EU Commission from taking measures against excessive surpluses, which the commission sees as potentially just as destabilizing. Germany has been achieving these surpluses year after year.

The EU's Task

Top German politicians have begun to escalate the budget policy dispute with Italy. October 17, the German EU Budget Commissioner, Günther Oettinger announced that the EU Commission would not approve the Italian budget. He assumes that "due to the data, it is probable that we will have to ask Italy to correct its draft budget," he threatened by twitter.[1] Therefore, due to its targeted deficit at 2.4 percent of its gross domestic product (GDP), Rome is facing a major confrontation with Brussels as well as a tightening of its financial and economic parameters. Recently, Chancellor Angela Merkel had reiterated that Berlin would officially hold back on the upcoming dispute. Accordingly, the EU institutions are supposed to enforce Italy's compliance with the constraints imposed by the EU's Growth and Stability Pact - formulated primarily by Germany's former Finance Minister Wolfgang Schäuble during the euro crisis. According to Merkel, the EU Commission is now the institution "Italy must now speak to and engage in dialogue."[2]

"Just Above Junk Status"

At the same time, German media and politicians are intensifying their campaign against Italy. Negative reporting can contribute to the destabilization of Italy's financial and credit markets, thereby driving up Rome's financial charges. The rising interests and falling stock market prices, are aimed at forcing the deeply indebted and stagnation-saddled Mediterranean country to return to the conditions of Berlin's austerity policy. Germany's most widely read news portal writes that Italy is experiencing a "black week."[3] Investors are already withdrawing capital from the euro zone's third-largest economy. Since Brussels wants to grant the Italian government only a maximum 1.5 percent new debt, which Rome cannot accept, the EU "may for the first time reject a national budget and impose sanctions." Italy finds itself "just above junk status," was the headlines of a business journal, in reaction to the devaluation of the country's creditworthiness by Moody's rating agency.[4] On October 20, it had drawn "consequences from the Italian government's budget policy" and downgraded Rome's long-term debt to "Baa3." The Italian budget constitutes an "unprecedented violation" of EU rules.[5] That Mediterranean country gives "ultimate cause for worry," according to commentaries in German flagship media.[6]

The Return of the Banking Crisis

Italy's rising financial expenses, accompanying the political confrontation with the German austerity policy, are costing Rome "supplementary billions," it is reported.[7] Therefore, Italy's finance minister must offer "interest rates at more than 3 percent higher" than his German counterpart, while Italy reschedules €400 billion in debts annually. The rise in rescheduling costs, which has caused the Italian debt to grow to around 131 percent of its GDP, is accompanied by supplementary pressure on Italy's fragile financial sector, which is shouldering also an enormous debt, while continuing to suffer under bad loans. In 2016 alone, Italy's banks were confronted with €201 billion in defaults on guaranteed loans - of a "total of €1,400 billion in loans."[8] By August 2018, this amount could be brought down to €126 billion through capital increases. Considering the bank's liabilities, there still remains a potential loss of around €40.5 billion. In addition, Italy's banks have increasingly bought Italian government securities, which now - due to the conflict with Brussels - are devaluating. In 2007, Italy's financial institutions took on €264 billion in government securities, which by August 2018, had swelled to €372 billion. The government in Rome's appeal for the financial sector to provide €1.2 billion is directed at a sector that is fragile, according to commentaries. Initially it seemed as though the banking sector had "overcome its roughest problems," however, it must "now confront the danger that the increasing risk surcharges on Italy's government securities could soon make a new capital increase necessary."

Surplus World Champion

The escalating conflicts over Italy's budget deficit - which is collaterally applying pressure on the euro zone [9] - had been preceded by the publication of a prognosis of Germany's current account surplus for 2018, which again is at record level.[10] According to the Munich-based Institute for Economic Research (ifo), Germany's current account surplus will total US $299 billion, a surplus of about 7.8 percent of the GDP - at about the same as in 2017 (7.9 percent). Germany holds first place in the world for the third consecutive year. China, which had been in first place in surpluses for a while, underwent a change of course and is not expected to be among the world's 2018 top three countries with the highest surpluses. High account surpluses are a problem, because facing the countries with surpluses are those forced to make deficits. The German obsession with exports is tantamount to exporting debts.

Unequal Regulations

The International Monetary Fund (IMF) and the United States (which has accumulated a deficit of around €50 billion in relationship to Germany) are not the only ones criticizing Germany's high export surpluses through its "Beggar thy Neighbor" policy. The EU Commission is doing it also. The Commission classifies surpluses exceeding six percent of the GDP to be potentially destabilizing. On the other hand, the commission has never taken measures against Germany, which has been in excess of six percent for many years. The rules of the reformulated Growth and Stability Pact, laid down at the height of the euro crisis, stipulated that only those countries with deficits must worry abut sanctions, while the countries with a surplus may merely be "warned" by Brussels. These unequal regulations are primarily due to Germany's Finance Minister at the time, Wolfgang Schäuble. This course of action significantly illustrates the new distribution of the means of power within the euro zone during the euro crisis.

Homemade "Practical Constraints"

Originally, the EU Commission had sought to combat imbalance within the euro zone - both deficits as well as surpluses. Germany should "not generate its prosperity by exporting commodities, for which other countries must generate debts," was the objective. It was reported in November 2011, that for months, Schäuble had been fighting against the EU Commission's plans to penalize countries with large surpluses.[11] The finance minister's persistence was crowned with success. "Schäuble ... got what he wanted." In a declaration on November 6, the Commission gave in and conceded to Berlin that "unlike deficits," "major and persistent surpluses will not lead to sanctions." Today, Berlin can let the EU norms, it had created during the crisis, work as alleged practical constraints, to its own advantage. Brussels' regulations function as the transmission belt for German supremacy within the euro zone.


[1] Widerstand gegen Italiens Schuldenetat. tagesschau.de 17.10.2018.

[2] Eskalation programmiert. tagesschau.de 22.10.2018.

[3] Hans-Jürgen Schlamp: Eine schwarze Woche für Italien. spiegel.de 22.10.2018.

[4] Italien kurz vor Ramschstatus. manager-magazin.de 20.10.2018.

[5] Italien-Haushalt "noch nie dagewesener" Verstoß gegen Regeln. wiwo.de 18.10.2018.

[6] Tobias Piller: Endgültig Anlass zur Unruhe. faz.net 22.10.2018.

[7] Hans-Jürgen Schlamp: Eine schwarze Woche für Italien. spiegel.de 22.10.2018.

[8] Tobias Piller: Italiens Banken ächzen unter einer doppelten Last. 18.10.2018.

[9] Die Märkte blicken auf Italien. wiwo.de 22.10.2018.

[10] Deutschland hat erneut den größten Handelsüberschuss. sueddeutsche.de 20.08.2018.

[11] Florian Eder: Schäuble verhindert Strafe für deutschen Überschuss. welt.de 20.11.2018.