Eurogroup resists Greece, Italy fiscal flexibility bid

Greece and Italy met resistance on Thursday, Oct. 8, when they asked eurozone finance ministers in Luxembourg for more room in EU budget rules to cushion households and businesses from higher energy costs. The meeting took place as a sell-off in French government bonds kept France's borrowing costs near their highest levels in about 25 years, adding to doubts about public finances across the eurozone.ekathimerini

The ministers' task is to respond to an energy shock without undermining a budget framework that markets are watching closely. Eurogroup President Kyriakos Pierrakakis called it a "difficult equation." "We need to protect households and businesses, but at the same time safeguard the fiscal credibility of our framework," he said.ekathimerini

Athens and Rome make their case

Ministers discussed the letters that Greek Prime Minister Kyriakos Mitsotakis and Italian Prime Minister Giorgia Meloni had sent to European Commission President Ursula von der Leyen. Pierrakakis said their goals should be pursued "within the rules we have in front of us". Greece wants temporary support measures, up to a set limit, left out of the net expenditure indicator used to measure compliance with the rules. It also wants the extra VAT revenue from higher prices taken into account. Italy proposed using part of the additional tax revenue from inflation to pay for targeted, temporary relief.ekathimerini

The Netherlands rejected the idea. Finance Minister Eelco Heinen said repeatedly loosening the rules risks adding to debt, and he called for spending cuts and reforms instead. Belgium's Vincent Van Peteghem also opposed changing the rules or using a national escape clause. Spain's Carlos Cuerpo said Madrid was open to considering Italy's proposal. German Finance Minister Lars Klingbeil called for a coordinated European response, including making oil companies with higher profits contribute, but he did not back more fiscal flexibility. The full EU finance ministers' council, known as ECOFIN, meets on Oct. 9.fakti+1

France at the center of the storm

France's 10-year yield reached its highest level since 2002 after rising about 70 basis points in September, Reuters reported. The gap over German yields hit almost 160 basis points last week, the widest since 2012. Paris has said this year's deficit will exceed its 5% target, and it plans to sell a record 340 billion euros of bonds in 2027. Reuters reported on Oct. 5 that the strain has spread to the euro, which is sliding, and to Italian spreads, which widened at their fastest pace since the COVID-19 crisis.reuters+1

In the Telegraph, a commentary warned that France's "debt bomb" risks "setting the eurozone on fire." It pointed to protests this week in which about a quarter of a million people took to the streets on Tuesday.telegraph

Some investors move back in

Not everyone is selling. The Financial Times reported that some large investors have started "bottom fishing" in eurozone bond markets after the French sell-off. According to Reuters, traders are sorting more carefully between countries, buying German, Dutch and Swiss debt while selling the bonds they see as riskiest. "They are punishing those countries that they do not believe are fiscally disciplined," one market participant told Reuters.reuters+1