Italy-EU tensions set to intensify

Tensions between Italy and the EU are likely to escalate next week. Indeed, the Government has until Tuesday to submit a re-drafted budget, and despite coming under pressure from European policymakers this week, it is unlikely to make enough changes to placate the European Commission. Whether or not the EU increases its oversight of Italy’s budget, or even eventually imposes fines, the big picture is that slow growth and a widening budget deficit next year are likely to push Italy’s bond yields up further.