The Italian government insists that it can meet its 2.04% deficit target, but an increasingly sceptical European Commission projects that the figure will be closer to 2.5% – a point of contention that appears likely to reach an inflexion point between by mid-week when officials from the EU-28 meet in Brussels to approve a European Commission report confirming that Italy is in breach of bloc’s fiscal compact.
Approving the report gives the European Commission the mandate to trigger an Excessive Deficit Procedure which, in theory, could culminate in a multi-billion-euro financial penalty. Imposing a fine of this magnitude would be unprecedented and there are signs that the Italian government is bracing for a head-on confrontation with the EU executive.
Earlier in June, the Italian parliament unanimously approved the introduction of a promissory note” known as a mini BOT that can be used to pay taxes and would be issued in denominations equivalent to the euro and with an expiry date, much like traditional banknotes. The plan was drafted by Lega, one of the two governing coalition members in the Italian government.
The country’s economy minister, Giovanni Tria, came out against the plan, however, saying on 8 June that is was either “illegal” or “useless”.
His view echoed that of European Central Bank head, Mario Draghi, who dismissed BOT bills as either a “second currency” – which is illegal under EU law – or additional public debt.
Italy’s Deputy Prime Minister Matteo Salvini defended the BOT plan as a means to settle payments with state suppliers, while Prime Minister Giuseppe Conte and Tria have pushed for a more conciliatory approach.
Both Lega and their coalition partner, the Five-Stae Movement, have made clear that Italy will not under any circumstances begin to implement austerity or fiscal consolidation measures at this time.
Emboldened by a 34% victory in the last European Elections, Lega’s is pushing for a “fiscal shock” to revive Italy’s struggling economy and has proposed a corporate tax cut of up to 15% to stimulate growth.
Conte recently argued that the ECB needs to guarantee Italy’s national public debt to keep spreads under control. His proposal is unlikely to garner much support outside of Rome or to be accepted by net contributors to the EU budget, namely from Germany and The Netherlands.
Though Italy remains the EU’s third-largest economy, many believe Rome’s influence over the ECB is waning as Draghi, an Italian, is due to complete his term in the autumn.