While Pierre Moscovici calls on Rome to keep its budget deficit under control, the Italian government is calling for debt restructuring.

Italy remains on a collision course with Brussels over the budget deficit, with the government and the ECB’s Mario Draghi calling for a more systemic approach to the Eurozone’s crisis-management arsenal.

Italy holds its red lines

The Commissioner asked Italy to target “wasteful spending” and prioritise investment to help stimulate growth. However, in a statement to Reuters he called on the Italian government to remain a “(…) credible country willing to secure that its debt is under control.”

Meanwhile, in Rome, there is little appetite for measures that will either increase revenue or reduce spending. On Thursday, Deputy Prime Minister Luigi Di Maio reiterated that there would not be a VAT hike.

Throughout the week, the leader of the Five Star Movement (MS5) dismissed rumours of dismissing the Minister of the Economy, Giovanni Tria. However, he has confirmed that he expects him to find the fiscal space to deliver on flagship policy commitments, that is, a citizens’ minimum guaranteed income of €780, a rollback in pension reforms (Fornero law), and the introduction of a two-tier flat tax (15% and 20%).

Finding a fiscal balance is increasingly difficult, as the OECD moved on Thursday to cut growth projections for Italy from 1,4% to 1,2% for 2018 and 1,1% for 2019.

Time for decisions

The Italian government is due to deliver its official budget plan this coming week.

The Minister of the Economy, Giovanni Tria, has reiterated a commitment to a budget deficit of 1,6% for 2019. That is twice as big as the 0,8% envisaged from the previous administration; however, he is under pressure to deliver on policy commitments.

Given the pressure to increase spending and reduce the overall tax burden, delivering on the 1,7% deficit target becomes more difficult both for this year and the next. The OECD report on Thursday suggested that the Italian government should refrain from rolling back the 2011 pension reforms. Hours later, Di Maio commented that the Paris-based think tank should refrain from interfering in Italian affairs.

While Rome is not badging, there are increasing calls for “systemic reforms.”

Calls for a more systemic ECB role

In a paper published by the 81-years old European Affairs Minister Paolo Savona on his personal website on Thursday, Rome proposes a pan-European debt restricting program.

The plan envisages a long-term restructuring program underwritten by the European Central Bank to reduce public debt to below 60% of their GDP. Italy’s public debt currently stands at 132% debt-GDP ratio.

Debt restructuring would entail debt reprofiling.

The ECB should offer a “guarantee” of repayments on newly issued bonds, replacing old ones, in exchange for a share in future tax revenue and/or shares in public assets.

In a more political comment, Savona noted that there is no reason for the ECB to guarantee bank deposits but not sovereign bonds.

The European Commission hailed the contribution “to a very important debate” without commenting on the substance of the plan, Reuters reports.

Savona is considered the economic guru of the Five Star Movement (MS5) and was initially signalled out as a Minister of Finance. He was given an alternative portfolio as the President of the Republic vetoed his appointment.

The Lega’s economic spokesman, Claudio Borghi, has argued that the ECB could cap bond yields offered to no more than 150 basis points. On Thursday, Italian 10-year bonds had a 235 bps spread compared to the German benchmark Bund.

Draghi proposes new crisis management instrument

While the ECB offered no comment on the Italian plan, President Mario Draghi suggested on Wednesday a new “fiscal instrument” that would allow the Eurozone to “risk share,” thereby reducing systemic volatility. That proposal echoes views expressed by the Macron administration for an EU budget, a policy objective to which Germany and the Netherlands object.

Against conventional wisdom in Germany, Draghi proposes an “adequate” instrument that complements monetary policy “to ensure macroeconomic stability.”

Draghi wants the EU to acquire the ability for countercyclical economic policy that would facilitate market integration, boost growth and protect the eurozone from global volatility, including protectionist policies. Draghi cited projections of 14% additional growth over a decade if intra-EU trade barriers were removed.

“In an international environment where trade openness can no longer be taken for granted, a broad and deep internal market may become even more important to shield us from external shocks,” Draghi said.