Euro falls on rumors Italy’s populists are pushing for higher deficit

Italy’s Interior Minister and deputy PM Matteo Salvini (R) and Italy’s Labor and Industry Minister and deputy PM Luigi Di Maio gesture during the swearing in ceremony of the new government led by Prime Minister Giuseppe Conte at Quirinale Palace in Rome on June 1, 2018.

The euro is under pressure on Thursday morning after media reports suggested that Italy’s coalition government is pushing for a deficit of 2.4 percent for 2019.

The euro fell 0.3 percent against the dollar to $1.17 at around 7.13 a.m. London time. Bond markets were also nervous about the spending plans in Italy, with the yield on the 10-year government bond moving higher to about 2.968 percent.

The market instability comes amid disputes within the coalition government over its spending plans. Rome is putting together its 2019 budget — a key document for market players as they look for certainty regarding the future spending plans of the new government.

The coalition that took power in the spring is formed by two populist parties from opposite ends of the political spectrum. Both have promised to increase spending and want their campaign promises to be delivered in the next budget — a headache for the finance minister, Giovanni Tria, who needs to find fiscal room for the populist measures, while also ensuring the debt pile does not go up.