EU warns of Italy’s debt as new government proposes more spending

EPA-EFE/STEPHANIE LECOCQ

(L-R) Valdis Dombrovskis, Vice President of the European commission for the Euro and Social Dialogue, European Commissioner for Employment, Social Affairs, Skills and Labour Mobility Marianne Thyssen, and European Commissioner for Economic and Financial Affairs, Pierre Moscovici give a press conference on the European Semester Spring package at the European Commission in Brussels, Belgium, 22 May 2018.

EU warns of Italy’s debt as new government proposes more spending


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With uncertainty still brewing over how the new populist Italian government will approach its relations with Brussels, as well as its commitments to its creditors, the EU executive on May 23 appeared to be making a calculated move to head off a potential clash with the incoming Eurosceptic, anti-establishment administration when it released its country-specific recommendations that said Italy had fully respected the debt rules for 2017 and can be considered largely compliant with the preventive regulations set out by the EU’s Stability and Growth Pact.

The incoming Italian government will have to proceed with a corrective budget of €10 billion, given its systemic importance to the future of the Eurozone and its critical position as the EU’s third-largest economy.  Brussels has warned that “Italy could be a source of potentially significant spillover to the rest of the Eurozone area” if it fails to abide by

Rome will also have to make structural adjustments of at least 0.6% of its GDP,  even if Italy were to avert the opening of a procedure for an excessive deficit, according to the Vice-President of the European Commission, Valdis Dombrovskis. A new assessment for Italy and Belgium’s –  the two Member States to be placed under heavy scrutiny  – debt will be made by the spring of next year.

“We have judged the conformity of the Italian debt to be sufficient”, said Dombrovskis, “but the reduction must continue considering that Italian debt is the second highest in Europe after Greece”. His viw was backed by the Commissioner for Economic Affairs, Pierre Moscovici, who suggested that “Italian debt is an important issue for the future of Italy and it needs a credible response”.

Italy’s two new Eurosceptic political leaders, Matteo Salvini from the far-right Lega (League) and the populist leftist 5-Star Movement’s Luigi Di Maio, are now key variables for any future debt and deficit growth, but the Commission has vowed to work with the incoming government, despite their open antagonism to Brussels.

“We respect democratic legitimacy and we look for constructive cooperation based on dialogue, respect, and understanding,”Moscovici said in reference to working with the Lega and 5-Star government.

The European Commission also addressed a warning to Hungary and Romania regarding their own Significant Deviation Procedure, which allows a Member State to correct a deviation from their medium-term objective (MTO), and turn towards their MTO in order to avoid the opening of an Excessive Deficit Procedure.

The EU finance ministers have recommended that Hungary take appropriate measures in 2018 to correct the matter. For Romania, which is already the subject of a significant deviation procedure, the EU executive recommends measures for 2018 and 2019 to correct the significant deviation.

Spain’s budgetary plan was also under review by the European Commission, which said it saw “no change to Madrid’s policy”, adding that Spain’s Draft Budgetary Plan is broadly compliant with the Commission’s requirements under the Stability and Growth Pact. Their view was drawn from the fact that the Commission’s Spring 2018 Economic Forecast for Spain projects that the country’s headline deficit will be below the Treaty reference value of 3% of GDP in 2018.

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