The European Commission greenlighted Italy’s 2020 budget plan but not without reservations about its compliance with the Stability and Growth Pact.
Italy is not alone. Similar reservations were expressed about Belgium, Spain, France, Portugal, Slovenia, Slovakia and Finland.
The commission noted “significant deviation” from adjustment paths and expressed particular concern regarding the “debt reduction benchmark” in the case of Belgium, Spain, France and Italy.
The outgoing Economic commissioner Pierre Moscovici told the press on Wednesday that Germany and the Netherlands should follow a more expansionary budgetary policy, echoing the view expressed by the European Central Bank (ECB).
But while this should signal the de-escalation of tension between Rome and Brussels, the Italian government is threatening to block plans to reform the European Stability Mechanism (ESM). The reform was agreed by the Eurogroup in June, prior to the collapse of the Lega-MS5 coalition.
“A reform of the ESM that crushes Italy is not feasible,” 5-Star Movement (M5S) leader Luigi Di Maio told Wednesday’s Corriere della Sera.
The ESM reform discussed in June envisages the fund as a lender of last resort for failing banks but also as the final arbiter of debt restructuring should a government be unable to meet its sovereign debt obligations.
Bank of Italy Governor Ignazio Visco said last week that a debt restructuring mechanism could “trigger a perverse spiral of expectations of default, which may prove to be self-fulfilling.”
In the current political context, the Italian government is likely to block the extension off the ESM mandate to include debt-restructuring.
Italy’s two trillion euro burdens the country with 138% debt-to-GDP ratio, which is second only to Greece in the eurozone. EU rules stipulate that eurozone member states with debt above 60% of GDP must gradually reduce it.