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Italy's debt crisis aggravates the EU's "sharpening of knives"! Is the euro really undervalued?
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SMM News: on Wednesday, the European Union was more likely to take disciplinary action against Italy because of its growing debt, while the Italian authorities took temporary measures to avoid triggering the process. If triggered, the process could shake Italy's economy by imposing hefty fines and scare away investors.

According to the document, representatives of EU member states agreed that such action was justified. This attests to the European Commission's judgment that Italy's failure to reduce its huge public debt has violated fiscal discipline. Outgoing European Commission President Jean-Claude Juncker said Italy was "going in the wrong direction" or would implement an excess deficit procedure that could last for years.

Italy is going in the wrong direction?

There have been fiscal conflicts between Italy and the European Commission since the Eurosceptic coalition came to power a year ago. However, after a spate of infighting in recent months, the coalition government has shown a rare show of unity, with party leaders suddenly agreeing on a willingness to address the EU's misgivings.

After meeting with other leaders, Italian Prime Minister Conte said they would work together to avoid disciplinary proceedings in the European Union. "our common goal is to protect economic growth, jobs and tax cuts while avoiding violations of discipline," said Deputy Prime Minister Salvini. "

Italy's debt has risen from a low level before the financial crisis, from 104 per cent of domestic output in 2007 to 132 per cent now, second only to Greece in the eurozone. The European Commission expects the ratio to rise further to 135% next year.

The EU also wants Italy to reduce its structural deficit to make its debt more sustainable. The structural deficit does not include one-off income. Two European sources said EU governments agreed that disciplinary proceedings could be avoided if Italy made a new proposal.

Italy insists no budget changes will be made

But encouraged by the strong performance of the Italian Union Party in last month's European Parliament elections and local polls, Salvini made tax cuts a priority and repeatedly targeted Brussels, calling for a comprehensive reform of the EU's fiscal rules. He insisted on Tuesday that there would be no budget changes or tax increases. Italian Finance Minister Treya is not impressed by the progress of the situation in Brussels, saying the final decision will be made by the finance ministers of the member countries of the euro zone. He also saw no need to revise the budget, but it would be implemented if necessary. He also said Italy's deficit would be lower than originally expected as a result of reduced spending. But that may not be enough to stop the EU from taking action, which will now step up negotiations to get Italy to make more fiscal commitments. If no compromise can be reached, the European Commission could recommend starting an excess deficit process as early as June 26, officials said. At that time, EU member States will have to formally launch the procedure at the last meeting before the summer recess on 8-9 July, which could lead to unprecedented fines.

The OECD model shows that the euro is 22 per cent undervalued

According to the purchasing power parity model of the Organization for Economic Cooperation and Development (OECD), the euro is undervalued by more than 22 per cent against the dollar. In addition, there is the Big Mac index, which measures currency valuations, showing that the euro is undervalued by about 15 per cent.

Kit Juckes, chief global foreign exchange strategist at Societe Generale, said most indicators showed that the euro was undoubtedly undervalued and that the persistent current account surplus made it difficult to argue that the euro was not undervalued while unemployment fell.

The euro has fallen about 4 per cent against the dollar over the past 12 months and will be watched by the US government if the valuation of the dollar makes US exports less competitive overseas. An overvalued dollar would also be a concern for monetary policymakers because it would curb import prices and hinder their efforts to boost inflation.

Jane Foley, head of monetary strategy at Rabobank in London, said Fed policy was partly responsible for the valuation of the euro. Since 2015, the Fed has greatly increased the level of policy normalization, which is unique among the G-10 countries, which has undoubtedly helped to support the dollar. Of course, it can also be said that Trump's 2018 tax cuts increased the need for the Fed to raise interest rates last year.

The euro is only "slightly undervalued" against other currencies

Adam Cole, chief foreign exchange strategist at Royal Bank of Canada's capital markets, said in an interview on Tuesday that the euro was only undervalued by a few percentage points based on long-term indicators that exchange rates would bring national CPI to the same level.

Us President Donald Trump had previously said in a tweet that "the depreciation of the euro and other currencies against the dollar puts the United States at a great disadvantage." Mr Trump "calls it devaluation rather than undervaluation, which means it is deliberately undervalued. But the Cole does not think so, which is a side effect of monetary policy, but there is no policy to keep the exchange rate undervalued.

ECB President Jean-Claude Draghi is expected to affect the short-term volatility of the euro in a speech to be delivered at the ECB event in Frankfurt on Wednesday. The euro is up about 1.4 per cent against the dollar so far in June. The euro held steady at 1.1329, up 0.03% on the day, close to a three-month high of 1.1348 on Friday.

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