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EU Rejects Italy's Draft Budget: EWI in Focus

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European Commission has rejected Italy’s draft budget for 2019. The commission has given three weeks time to submit the renewed budget. The Italian government has shown no sign of backing off with the Economy Minister Giovanni Tria saying that Italy's 2019 budget plan "does not expose the financial stability of Italy, or that of the other countries of the European Union, to risk." “In fact, we think that the reinforcement of the Italian economy is in the interest of the whole European economy" he added (see: all the European Equity ETFs).

Per the Commission, Rome will now have to submit a fresh budget that would cut the country's structural deficit by 0.6% of GDP, rather than increase the deficit by 0.8%, failing which it could impose fines of up to 0.2% of GDP, or 3.4bn euros ($3.9 billion).

Never earlier has EU formally rejected a member state budget plans since it attained the power to do so amid the 2013 sovereign debt crisis. Italian debt stands at 130% of country’s GDP much above 60% ceiling limit kept by EU. The country is only next to the crisis hit Greece. The rejected budget intended to increase the overall government debt and deficit in the short run to 2.4% of GDP over the coming years, which are in breach of the previously mandated maximum deficit level of 0.8% GDP.

Valdis Dombrovskis, the European Commission vice-president said Brussels had "no alternative" but to reject the proposals, adding that even after giving Italy a chance to make changes to the budget, it had refused.

The draft budget tried to focus on providing minimum income to the unemployed and among other measures kept increased spending on infrastructure, welfare, tax cuts and scrapping extensions to the retirement age-fulfilling several key campaign promises from the election in March. Brussels was wary of the effect that these increased proposed expenditures would have on the third-biggest economy in the Eurozone as these proposed measures are supposed to be funded by debt (read: 5 Quality ETFs for a Healthy Portfolio).

European shares fell to their lowest levels in two years on Oct 23, prior to the Commission announcing its rejection of the Italian budget. Following the news, Italy-Germany 10-year bond yield gap -- used as a comparative yardstick to indicate Italy's position in the markets, widened to a new high of 314 points (read: How to Hedge Stock Volatility With ETFs).

Italian bonds slipped post the news as investors flocked toward German and U.K. bonds for safe haven. With prime minister Conte citing that there is no Plan B when it comes to the budget, popular Italian ETF iShares MSCI Italy ETF EWI could experience great volatility in the days to come. The ETF has already lost nearly 14.4% year to date.

EWI in Focus

The fund tracks the MSCI Italy Index and is majorly focused on large caps. Financials (29.5%), Energy (20.4%), Utilities (15.9%), Consumer Discretionary (15.7%) and Industrials (11.3%) are the sectors having double-digit weights. The fund comprises 24 holdings and its shares are traded nearly 1.3 million times daily. It carries a Zacks ETF Rank #4 (Sell) with a Medium risk outlook.

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ISHARS-ITALY (EWI): ETF Research Reports
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