Less than 24 hours following the categorical rejection of Matteo Renzi’s proposal for looser budgetary policy by Commissioner Pierre Moscovici and Eurogroup President Jeroen Dijsselbloem, the Vice President of the Commission Valdis Dombrovskis is presiding over a policy turn, if not a U-turn, il Sole 24 reports.
Breathing room for Renzi
Renzi’s proposal calls for Italy to be allowed to maintain a 2,9% deficit for five years, allowing the country to pump a minimum of €30bn a year in public investment to regenerating growth. Under current rules, the Italian budget must aim for a 2.1% GDP deficit in 2017 and 1.2% in 2018. These objective have suddenly loosened.
Politically, that is good news.
Renzi’s so-called “big break” plan has been on and off the table in Brussels since April 2016. The concept of “a break” has provided the foundation for Renzi’s book “Avanti,” launched this week as a “progressive manifesto” or, in non-social democratic terms an introduction to the 2018 electoral campaign.
Skepticism over the plan in Brussels has never subsided. But, from a tactical point of view, this deviation from a hard fiscal consolidation hardline provides Rome with scope to reduce the Italian deficit only by 0.3% of the GDP.
In turn, the ruling PD is allowed to campaign against a surging Eurosceptic opposition for the spring 2018 elections without hiking sales taxes or further spending cuts. On the contrary, PD will be able to demonstrate that negotiations pay, presumably holding the nihilistic narrative of the Five Star movement at bay.
From “no” to “maybe”
On Tuesday, the Commissioner for Economic and Financial Affairs Moscovici argued that fiscal compact rules have already been applied with flexibility in the case of Italy. Meanwhile, the President of the Eurogroup Jeroen Dijsselbloem said that Italy couldn’t unilaterally suspend budget rules. “We are in this monetary union together,” Dijsselbloem said.
On Wednesday, Dombrovskis sent a letter to economy minister Pier Carlo Padoan in which he signaled that there is scope for “flexibility” in 2018.
“The Commission may in some cases consider as adequate a fiscal adjustment somewhat below the requirement prescribed by the matrix,” the letter reads.
Although Vice President Dombrovskis also underscored that Italy must return to a budgetary trajectory that reduces its 133% debt-to-GDP ratio, the bottom demand of Commission is a budget plan that cuts public spending sufficient to meet debt servicing costs.
That brings a sigh of relief in Rome. Prime Minister Paolo Gentiloni hailed the letter as “good news,” as Italy will no longer have to achieve a massive 0,8% structural deficit adjustment. Renzi has been given some breathing space, although Italy still faces an uphill road.