In what was an expected step from the European Commission after the EU rejected Italy’s draft budget for 2019 and a recent exchange of recommendation letters between the EU Executive and the Italian government, Brussels has asked Italy to submit a revised budget plan within three weeks.
“For the first time the Commission is forced to ask a member state to revise its draft budgetary plan, but we do not see any alternative. Unfortunately, the clarifications received yesterday were not convincing,” Commission Vice-President Valdis Dombrovskis said at a press conference following the Commissioners’ weekly meeting in Strasbourg, France. “The Italian government is openly and consciously going against commitments made,” added Dombrovskis.
Dombrovskis said the Commission is opening the excessive deficit procedure (EDP), as Italy has managed to perform well within the Stability and Growth pact, mostly due to Italy’s broad compliance with its debt commitments. The current plans, however, are “a material change, which may require a reassessment of that conclusion. The ball is now in the court of the Italian government,” Dombrovskis added.
Italy’ current draft budget proposal for 2019 that planned for a deficit that was equal to 2.4% of the country’s annual output, a major increase from the previous centre-left government’s deficit goal of just 0.8% of GDP.
Within the EU, the Member States are expected to not run an annual deficit greater than 3% of GDP. European Union officials in Brussels worry that Italy’s fiscal plan will derail the reduction of the country’s debt pile €2.3 trillion — the second largest in the Eurozone.
Italy’s Eurosceptic, populist government has said that it would not comply with the EU’s policies of forcing the Italian government to enact measures that enforced low fiscal spending. The Italian government has, instead, said it would stick to its campaign promises and make good on pre-election spending pledges.
“Breaking rules can appear tempting at a first look, it can provide an illusion of breaking free. It can be tempting to cure debt with more debt, but at some point, the debt weighs too heavy,” said Dombrovskis.
Unless the Italian government revises its draft budget within the next three weeks, the Commission is ready to begin disciplinary procedures aimed at punishing Italy’s ruling anti-establishment political parties for its proposed excessive deficit procedure and lack of progress in cutting debt, according to Dombrovskis.
While the country’s debt-to-GDP ratio is the second-highest within the EU at 131.2%, with the highest debt servicing costs within the bloc, Italy’s interest expenditure stood at around €65.5 billion, or 3.8% of GDP, in 2017.
“Experience has shown time and again that higher fiscal deficits and debt do not bring lasting growth…excessive debt makes your economy more vulnerable to future crisis,” Dombrovskis added. “If looser fiscal policy affects confidence, it can actually have the opposite effect for growth”.