What's going on?
Italy and the European Union (EU) ended months of argument on Wednesday with a compromise on the country’s spending plans, saving it from the prospect of hefty penalties.
What does this mean?
The initial tension stemmed from Italy’s desire to spend significantly more money than it had on boosting the country’s economic growth. Italy wanted to stretch its “deficit” – the amount it spends beyond what it earns – to 2.4% next year. But the EU has strict rules on how far its members can dip into the red – and Italy, with an existing mountain of debt a third larger than its entire economy, was never going to have an easy time of it.
Sent back to the drawing board under threat of sanctions, Italy eventually – after molti lamenti – came up with the budget it needed, if not the one it wanted. It’ll now only overspend by 2% in 2019, and the EU can stomach that.
Why should I care?
For markets: Italy might win in a roundabout way.
Investors bought Italian government bonds on Wednesday, seemingly encouraged by the country’s lower risk of default given its revised spending plans. That sent bond prices up and yields down (the two move in opposite directions). Investors tend to view the yield of current bonds as a benchmark for interest rates on future bonds, probably resulting in lower future borrowing costs for Italy. It may therefore be able to borrow a little more than it had planned – and use the extra cash to invest in economy-boosting infrastructure.
The bigger picture: Move over Europe, India’s in town.
Europe’s in-fighting might be taking its eye off the international ball – and from India racing up the inside lane, in particular. According to the International Monetary Fund, India’s set to zoom past the UK and France to become the world’s fifth-largest economy in 2019, thanks to a whopping population and favorable demographics that also make it the world’s fastest-growing economy.