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Giuseppe Conte delivers a declaration after a meeting with Italian President Sergio Mattarella as part of consultations for a new government at the Quirinale Palace on May 23, 2018 in Rome, Italy.
There’s a standoff emerging between the European Union and the new Italian government, one which will ultimately answer the question whether Italy is too big to fail, a strategist told CNBC Thursday.
The new populist cabinet in Rome is set to cut taxes and increase public spending. This decision will challenge European fiscal rules and is an alarming prospect for EU officials, given that Italy has the second highest pile of government debt in the region, about 132 percent of gross domestic product.
German leader Angela Merkel made it clear during an interview over the weekend that the euro zone will never be a debt-sharing union. Meanwhile, the chief of the German Bundesbank also warned this week that there are a lot of differences between the economies within the euro and that each government needs to focus on reforming their own.
Discussing the policies presented by the new Italian government, one strategist said a confrontation between Italy and the euro zone, and wider EU, looked likely.
“I think these battle lines have been drawn and everybody knows exactly what they are doing,” Simon Derrick, chief currency strategist at BNY Mellon told CNBC’s Street Signs Thursday.
“The key question is ultimately whether Italy is too big to fail,” Derrick said. “It is too big to fail, and that’s where this is really going come down to, probably at some point later this year when the discussion about the spending program will start,” he suggested.