Will the italian government come back on its fiscal policy?

Italy still keeps centre stage in Europe, primarily due to the dramatic tug of war between the government and the European Commission. The main question at this stage is: will the government give in to European pressure and refrain from (partly) implementing its expansionary fiscal policy? Judging from the latest statements from the different key coalition figures, it would seem that neither the Five Star Movement nor the League intends to change their mind about the measures set out in the draft budget for next year. Even the minister of finance, Giovanni Tria , who has always proved to be far more moderate with the intention of reassuring the markets, has repeated that fiscal stimulus is the only way to restore Italian growth. Despite the threat of possible sanctions from the European authorities, the government is now unlikely to present a new budget with revised deficit targets. In reality , it is market discipline – and related tensions in the banking sector - that could exert enough pressure on the Five Star-League coalition to make it strike a more conciliatory tone towards European budgetary commitments. Italian sovereign bonds are currently still under pressure, with a 10-year BTP/Bund spread of around 300bp. If their yields were to rise significantly and for an extended period, it is very likely that the government would choose to backtrack on the implementation of one or several measures set out in the draft budget. After analysing the factors that could trigger a drastic and persistent rise in the spread over the coming six months, we identify one crucial factor: a marked slowdown in growth, even though the government expects a growth rate of 1.5% in its budgetary plan for 2019.