Italy’s revised budget remains roughly unchanged waiting for Europe’s fury

Jean-Claude Juncker, President of the EC, participates in the European Council taking place on 17 and 18 October 2018 in Brussels.
Date: 18/10/2018. Location: Brussels,Belgium.
© European Union , 2018. Photo: Etienne Ansotte

The Italian government concluded its revised budget a few hours ago and as expected the Italian budget plan remained the same with small amendments, such as plans to sell off some government real estate, but still is not respecting the EU fiscal rules. The latter is most likely not going to be left unanswered by the European Commission which might impose billions of financial sanctions against Italy and initiate the “Excessive Deficit Procedure” (EDP).

According to the International Monetary Fund (IMF), Italy’s deficit is rising in slower than the EC expects pace and leads the country into a recession. The third largest EU economy should avoid widening its deficits but target more on structural reforms, the IMF Europe Director Paul Thomsen said last week. The same stance was taken by the European Finance Ministers during last week’s Eurogroup meeting where it was stated that Italy has to change its position and comply with the EU budget rules; something that of course didn’t affect neither the Prime Minister Giuseppe Conte nor the two deputy prime ministers, Matteo Salvini and Luigi Di Maio.

However, the entire EU edifice is highly connected to the Italian economy and both are expected to be shaken to their foundations. Thus, it is very crucial that the EC‘s position on this matter to be extremely meticulous.

IMF warns about Italy

IMF has released its concluding statement about the Italian economy yesterday reporting that Italy has low growth and weak social results. The main drawbacks of the economy are concluded to be its unemployment rate, the living standards of middle-aged and younger generations and the real personal income.

Based on the above, the IMF proposes “a package of structural reforms, fiscal consolidation based on high-quality measures, and bank balance sheet strengthening”. As top priority is considered to be the implementation of structural reforms which can increase productivity. Furthermore, the fiscal policy needs to be modified towards growth and debt-to-GDP ratio should be lowered down dramatically as it is the second highest in the euro area.

Last but not least, the International Monetary fund ends up that if those suggestions are not implemented, then the Italian economy will be left very susceptible.

Italy defies Europe

The populist government of Italy is set to provoke once more the executive EU body. The revised budgetary plan which was confirmed late last night, just before the midnight deadline that was set by the EC, is basically validating the intentions of the Italian government and goes against the EU fiscal rules of the Stability and Growth Pact which implies that all EU member states have to follow a fiscal policy to stay within the limits on government GDP deficit of 3% and debt to GDP ratio of 60%.

The Italian coalition government seems ready to fulfil election campaign promises at all costs. Italian officials have repeatedly mentioned that would “respond to the needs of the Italian people” and follow their policy programme which includes a universal basic income, tax cuts and lowering the retirement age. The latter is going to be achieved through a 2,4% deficit target and a 1,5% growth forecast for next year according to the letter of reply to the EC. As Deputy Prime Minister Matteo Salvini said yesterday: “The Italian government will maintain its deficit and economic growth forecasts for 2019 despite European Commission demands for the budget plan to be revised”.

EU response

It is the Commission’s turn now to respond to the Italian revised budgetary plan. Since Italy didn’t comply with EC’s recommendation to lower its budget deficit and based on the fact that the EC will reject the budget again, the EC is likely to commence the EDP in order for Italy to get its budget deficit under control. This action can take place from November 21 till December 6. Italy will have six months to comply once the procedure begins. But the government would risk a fine of 0,2% of Italy’s annual GDP of 1.7 trillion euros in case of continuously failing to comply.

However, the collision between Italy and Europe is expected to cause serious consequences to the whole bloc. It has already increase to a great extent the Italian borrowing costs and the contagion risks could be transmitted to the rest EU economies very soon.

EU officials are well aware though that a very careful planning of the situation is needed in order not to create irreversible turbulences to the Old Continent’s economy. Besides, the European Central Bank has many monetary tools in its arsenal that could be used in such conditions.

But as Italy seems extremely unpredictable, everything is on the table.

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