WASHINGTON, Oct 14 (Reuters) – The sharp negative market reaction to Britain’s plans of tax cuts and large new borrowing is likely to be a stark warning to the emerging new Italian government and other EU countries to keep fiscal policy responsible, senior euro zone officials said.
European Union governments are now facing a quandary, torn between the need to shield households and companies from the surge in energy prices and the need to fight record inflation and keep public finances sustainable.
Italy in particular has long been a concern to other EU countries because of its large public debt of around 150% of GDP and slow economic growth — a combination that some fear could one day trigger a debt crisis that could threaten the euro zone.
Such concerns increased after right-wing parties won Italian elections in September, having called in their campaigns for a bigger budget deficit, higher pensions and welfare and a flat 15% tax for the self-employed, without saying how to fund it.
Meanwhile Britain’s plan to cut taxes and borrow heavily to freeze soaring energy prices triggered a backlash in the markets, forcing the Bank of England to intervene to support plunging prices of UK bonds.
„We don’t have lessons to give to the UK, we have a lesson to learn perhaps, because what happened showed how volatile the situation is and so how prudent we should be with our fiscal and monetary mix,” EU Economics Commissioner Paolo Gentiloni, an Italian, told a news conference without naming Italy directly.
Other officials, speaking on condition of anonymity on the sidelines of the IMF meetings in Washington, were more open.
„The UK example of how quickly and aggressively markets can turn on you, is likely to keep Italian policy cautious. I am sure Rome is watching carefully what is happening in the UK,” one senior euro zone official said.
„The example of the financial turmoil in the UK is diminishing chances of internal financial turmoil in the EU,” a second senior euro zone official said.
Reporting by Jan Strupczewski;
Editing by Sandra Maler
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