Looking Ahead (4 April)

Wednesday, 5 June - Salvini prepared for new budget showdown with European Commission

The willingness of Salvini to use his enhanced leverage post-European election will be almost immediately put to the test by the resumption of a budgetary dispute with the European Commission. On 29 May the European Commission sent a letter to Italian Finance Minister Giovanni Tria, drawing attention to Italy’s level of debt, and its lack of compliance with EU fiscal rules. Italian Finance Minister Giovani Tria was been given two days to respond. The letter reopens the route towards an EU ‘excessive deficit procedure’, which could ultimately result in large fines being imposed against Italy.

As we anticipated in our 31 May report, Tria’s response has been deemed inadequate by the Commission. It is now expected that the European Commission will issue a report on Wednesday, 5 June, that will open an excessive deficit procedure. The Commission is understood to be prepared to expedite the Excessive Deficit Procedure so that Finance Ministers could be asked as soon as the 20 June ECOFIN whether to sanction Italy. This could include the demand for payment of a non interest-bearing deposit of 0.2% of GDP.

Our expectation is that tensions will heighten, possibly culminating in an Italian general election. The direction in which Italian policy could move in a prolonged standoff – or following a general election – was signalled last week, when the Chamber of Deputies unanimously voted in favour of an assessment of the viability of introducing MiniBot debt notes. The introduction of MiniBot would likely be viewed by the ECB as a step toward a parallel currency and Italian Euro exit. Although the finance ministry has disavowed the vote, there is no guarantee that a Salvini led government would not look to proceed with the policy.

Wednesday, 5 June – Danish General Election

The Danish general election looks set to result in the outgoing right-wing bloc losing power. The grouping has been slipping in opinion polls with the anti-immigration Danish People’s Party – the mainstay of support for the government – leading the decline. The Social Democrats currently appear set to be the largest party, but – rather than relying on support of the traditional left-bloc, who are more positive on immigration – have suggested they could work as a minority government with the support of parties from the right.

The Danske bank scandal has played a part in the electoral campaign, with all parties promising reforms to the way in which Danish banks are regulated.

Thursday, 6 June - Peterborough by-election to test strength of Brexit electoral insurgents

The question since the European election has been whether the striking numbers produced by the UK vote can be even partly reproduced in Westminster elections, which operate by first past the post. An opinion poll published on 30 May suggested that in a general election the Liberal Democrats could receive 24% of the vote, the Brexit Party 22%, with the Conservatives and Labour both on 19%. This points to a splintering vote, even if seat distributions may not be so neatly divided.

The first real experiment in whether Brexit can cause political fragmentation at Westminster will come in the 6 June Peterborough by-election. If the Peterborough election delivers more atomisation it is likely to affect both the debate going on in the Labour party on whether to back a second referendum. Success for the Brexit party would also reinforce the sense within the Conservatives that the leadership contest – starting the following week – should be won by a candidate willing to take the UK out of the EU without a deal.

Thursday, 6 June – ECB Governing Council meeting to be accompanied by publication of latest Macroeconomic projections

The 6 June ECB meeting is unlikely to see any changes to the forward guidance on rates or the asset purchase scheme, with the bank set to remain in ‘wait and see mode’ for these key policy instruments. The meeting will though provide more information on TLTRO III, while Mario Draghi is likely to be pressed on tiering in the press conference – although we do not think that any such policy will be announced yet.

The backdrop to the meeting and to Draghi’s press conference will be the release of the latest set of ECB Staff Macroeconomic Projections, which will forecast annual inflation and GDP growth through to the end of 2021. Market participants will examine the new projections to see if the deterioration of past projections has now spread to 2020. We think that a more robust TLTRO programme will be favoured, over some GC objections, if growth for 2020 is significantly downgraded.