Brussels Edition: Roman Quandary

(Bloomberg) -- Welcome to the Brussels Edition, Bloomberg’s daily briefing on what matters most in the heart of the European Union.

As the Italian government pens a letter to Brussels explaining its failure to rein in debt, the European Commission has an unenviable choice to make: rules are rules, and even under their most charitable interpretation, Italy is not doing enough to put its finances in order. On the other hand, triggering a disciplinary process would play right into Matteo Salvini’s hands, days after the Italian League leader led his right-wing party to a triumph on the back of an anti-Brussels agenda. Next week’s Commission decision could tempt him to call a snap election.

What’s Happening

Orban U-Turn | In other dilemmas, the EU’s center-right parties must decide on whether to permanently expel Viktor Orban from their group after Hungary’s illiberal leader unexpectedly decided to call off controversial judicial reforms that would further undermine the country’s democratic standards. The climbdown was spectacular, but may have come too late. 

Death of a Deal | The EU has more powerful populists than Orban to deal with. Donald Trump is threatening penalties against the financial body created by Germany, the U.K. and France to shield trade with Iran from U.S. sanctions. The failure of the European vehicle to sustain trade with Tehran seems to be the final nail in the coffin of the nuclear accord, one of Europe’s landmark foreign policy achievements. 

EU Retaliation | The EU bites back: Americans seeking claims against Europeans doing business with Cuba will be liable to penalties in Europe, including asset seizures, the Commission said in a letter to the U.S. Chamber of Commerce. The warning comes after Trump decided to let U.S. citizens file lawsuits over property confiscated in Cuba during the 1959 revolution, which could result in a flood of litigation against foreign firms doing business in the island.

Trump’s Friends | To add insult to injury, Trump said he may meet Tory leadership contender Boris Johnson and leading Brexiteer Nigel Farage during his visit to the U.K. next week, prioritizing two politicians whose careers have been built around attacking the EU. His visit to London comes at a painful time for Britain, with Brexit in no man’s land and the government in disarray. Oh, and there’s also the Huawei dispute.

In Case You Missed It

Trade Deadlock | Still on the subject of transatlantic ties, negotiations between the EU and the U.S. to reduce tariffs on industrial goods and eliminate regulatory hurdles are showing few signs of going anywhere meaningful. This raises the risks of even more punitive tariffs, which will mostly hit Germany. There’s now a mix of anguish and frustration in Berlin and officials are asking themselves whether the relationship has already crossed the point of no return. 

Merkel at Harvard | The German chancellor used her commencement speech to criticize those who jeopardize global trade, refuse to tackle climate change, and undermine the multilateral system that has helped keep the world — largely — peaceful for the past 70 years. Leaving little doubt as to who she was referring to, she urged graduates to act with integrity and self-control in their careers. When she called on the students and university alumni to "tear down walls," they rose to their feet to applaud.

Turkey Flexes | Things don’t look much brighter on the EU’s eastern flank. Turkey is considering deploying a Russian missile-defense system along its southern coast, near where its warships are accompanying vessels exploring for energy. The deployment of S-400 batteries would dramatically enhance Turkey’s military capabilities in the Eastern Mediterranean, where it’s embroiled in a spat with Cyprus over offshore gas exploration. 

Caretaker Chancellor | Constitutional Court President Brigitte Bierlein will be sworn in as Austria’s first female chancellor, leading an interim government until early elections are held this fall. Austria was thrown into an unprecedented crisis two weeks ago, when a lurid video showed the nationalist vice chancellor promising government contracts in return for campaign funding from a purported niece of a Russian oligarch. 

Quiz Answer | And here’s the answer to this week’s quiz, about which former European Commissioner is also in the wine business. It’s Belgium’s Karel De Gucht, former trade commissioner. And since it’s Friday and we are on the subject of booze, here’s a recipe for the perfect picnic cocktail, courtesy of Bloomberg Pursuits.

Chart of the Day

Global trade tensions are the biggest risk to the euro area’s outlook, according to economists in a Bloomberg survey. The European Central Bank is set to publish new economic predictions when policy makers meet in Vilnius next week. Those forecasts will be presented to the Governing Council by Philip Lane, who takes over from Chief Economist Peter Praet on June 1 (Peter: We’ll miss you!)

Today’s Agenda

• Germany’s Angela Merkel meets U.S. Secretary of State Michael Pompeo in Berlin
• Pope Francis visits Bucharest

--With assistance from Zoe Schneeweiss.

To contact the editor responsible for this story: Heather Harris at Andrew Blackman

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