Europe faces economic turmoil as Italy gets closer to the Excessive Debt Procedure

Participation of Jean-Claude Juncker, President of the EC, at the Informal meeting of heads of state or government.
Personalities: Jean-Claude Juncker , Giuseppe Conte. Date: 28/05/2019. Location: Brussels – Council/Europa. Photographer: Etienne Ansotte. © European Union, 2019. Source: EC – Audiovisual Service

Italy is in serious trouble as the EU deputy finance ministers seem to support the European Commission’s opinion on the actions required to reduce the country’s public debt. The huge growing debt together with the centre-right and euroskeptic alliance government is causing turbulences as regards its relations with Brussels.

However, the Italian coalition leaders have met on Monday evening and it was decided, according to the Prime Minister, to avoid entering the Excessive Debt procedure (EDP) that will be financially devastating for Belpaese. But are Matteo Salvini and Luigi Di Maio really determined to change the Italian fiscal policy and compromise with the EU to reduce Italy’s public debt?

EC’s report on Italy’s debt

The Italian public debt-to-GDP ratio was 132,2% in 2018 which is the second largest in the bloc and well above the 60% of GDP reference value of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. The large debt is not decreasing and is projected to reach 133.7% in 2019 and 135.2% in 2020 based on both the government plans and the Commission’s spring forecast 2019 . The latter together with Italy’s slow progress on the 2018 Recommendations reveals that Italy is in a very critical situation and has no fiscal space to stabilise its economy which could lead to the EDP.

Will EDP be materialised?

The Excessive Debt Procedure is launched by the Council, based on recommendations by the Commission, once a country’s budget deficit exceeds 3% of gross domestic product (GDP) and public debt exceeds 60% of GDP. The executive body of the EU has warned Italy of taking disciplinary actions, such as the EDP, as this G7 country has breached EU’s debt rules and recommendations to reduce its public debt and cut its deficit. The European Commissioner Jean-Claude Juncker mentioned on the issue that “Italy was moving in an unsound direction and risked a procedure that could last years”.

The EDP is highly likely to be commenced despite the Italian Prime Minister’s attempts to persuade the leaders of League and Five Star Movement to change Italy’s policy and follow the EC’s recommendations on budget and debt. More specifically, Giuseppe Conte underlined two days ago that: “I will not be the first prime minister to bring Italy against the wall of the infringement procedure”.

Italy openly defies Brussels?

The populist government of Italy is set to provoke once more the Old Continent and the European Commission. Luigi Di Maio said yesterday on RTL radio that: “We are a founder nation of the European Union, we are on a level with Germany and France. We can demand more respect in Europe.” The Five Star leader also pointed out that no budget adjustment will be made in a compromise framework with the EC.

The leader of the right-wing party League added that: “We don’t need to ask Germans, Spanish and Luxembourgish for money. We want to use Italians’ money for Italians. Everything is fine at the top. Does the government go on? I never had doubts. The common objective is avoiding an infraction procedure by guaranteeing growth, the right to work and tax cuts. There won’t be any budget adjustment or tax increases.”

How Italy will meet the criteria of the Fiscal Stability Treaty without any modifications but instead with further tax cuts? It is very hard to believe that this government will compromise with the EC officials towards a viable solution without any disciplinary actions.

Will common sense ultimately prevail?

The Italian leaders are expected to meet again in the coming weeks to finalise the new programme. It is not the first time that Italy is facing the risk of EDP though. The second largest EU economy had failed to produce any results to reduce the country’s public debt in its draft budgetary plan for 2019 but managed to come to an agreement with the EC after altering its deficit figures.

Therefore, the need to decrease the large stock of public debt together with a revision of the spending expenditures seem mandatory in order not to enter a long-lasting procedure where corrective actions will take place to ensure its fiscal policy is conducted in a sustainable manner.

All in all, Italy is once more running out of time as the EU finance ministers will meet in Brussels on July 9th to decide on the formal opening of disciplinary proceedings. If the latter takes place, then the collision between Italy and Europe is expected to cause serious turbulences to the entire bloc as the contagion risks may be transmitted to the rest EU economies as well.

It is up to people such as Prime Minister Giuseppe Conte and Finance Minister Giovanni Tria to find the trade-off between Italy and Brussels that would make sure Italy is encouraged to keep its public debt under control and avoid possible sanctions and heavy fines.

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