For the Euro, All Roads Lead to Rome

Wherever you stand on Brexit or the EU, one undeniable fault with the union is the tension created by some aspects of integration having raced ahead of others.

Free movement within the bloc without adequate border controls at the periphery contributed in no small part to the migration crisis of 2016-17.

Similarly, the Euro has been undermined somewhat by a common monetary policy set by the ECB combined with only soft controls around a shared fiscal policy. Although many historical issues with the Euro have been overcome through sheer political will (many of the members with small economies historically and genuinely enjoy the safety in numbers approach of the common currency) and well timed doses of good fortune, it is now possible that Rome will present the largest stumbling block of all.

Earlier this month, with little fanfare, Italy declined to update their budget despite the request of the European Commission. The new radical-left, far-right government in Rome intend to cut taxes and increase spending to revive the country's ailing, dormant economy. This will run a deficit of 2.4 percent next year when EU rules call for a debt reduction. Despite some loose assurances from Rome and a commitment to sell state assets, the commission is deeply concerned. Italy's debt is 130 percent of GDP and the fifth largest in the world. The EU rule-book states that a fine should follow for Italy. Simple.

Except the situation is in fact quite a complex one. Should the commission attempt to fine Italy they would go against their own precedent.

Almost every country in the union has at one point fallen afoul of the fiscal benchmark and never has a fine been issued. By punishing the Italians they will vindicate the anti-European rhetoric of the government there, especially of Lega. Lega's leader Mattio Salvini has been a longstanding isolationist, before Trump and Brexit made it fashionable, and built a career on extracting his wealthy home region of Padonia from Italy. Realising that was not likely to succeed any time soon he changed tack and set his sights on extracting Italy from the EU. A token fine from the 'bureaucrats in Brussels' would suit Salvini perfectly.

Unfortunately for the commission, not fining Italy is not without problems either.

Both parties in Italy's polar-pairing campaigned on a euroscpetic ticket. MS5 softened on that considerably but the feeling amongst may is that Lega are biding their time. By allowing the budget to pass it will be presented as the EU caving in the face of a strong Italian stance. The perceived loss of face alone would unlikely trouble Brussels. However, there is the very real risk that Italy will continue on its path of widening deficits, which is possibly the largest threat to the currency and the bloc. The further down that road they go the more difficult it will be to change course.

One way or the other Italy is likely to be a fork in the road for the common currency. The European Stability Mechanism will be expanded to explicitly take on and share southern European debt as the final major step towards a complete currency; or the divergence between north and south will lead to ever more rule breaking and towards the currency's death by a thousand cuts. For the Euro at least, all roads lead to Rome.

Liam P. Browne is an economist by education and a financial consultant by trade. He is a specialist in derivatives contracts, currently working in London and splitting his time between there and Mexico City. Liam studied in Newport, Rhode Island, as well as in Ireland and Belgium. He graduated cum laude from The Katholieke Universiteit Leuven in 2011 as a Master of Business Economics. He is a self-professed expert on all matters EU; especially how its workings impact financial markets and economies. Any questions or requests can be sent to @EUderiv on Twitter for an (unaffiliated) answer or discussion. To read more of his reports — Click Here Now.