The European commission is expected to ask Italy’s indebted government to revise its 2019 draft budget, the first time such a request will have been made of an EU member state.
Italy refused to compromise on its economic targets, sending a letter to Brussels on Monday explaining why it will raise its deficit – the gap between government spending and income – to 2.4% of GDP. The prime minister, Giuseppe Conte, told reporters in Rome that the government was not being led by “a bunch of hotheads” and that the increased borrowing was needed to ensure that Italy’s economy grows.
Conte said the government, made up of a coalition of the anti-establishment Five Star Movement and the far-right League, would need €17bn (£15bn) to fund election campaign promises including tax cuts, a universal basic income and pension reforms.
“We studied this for a long time and concluded that if we had continued on the same road, Italy would have entered into a recession,” Conte said.
A spokesman in Brussels confirmed that the commission, the EU’s executive arm, had received the Italian government’s response to its initial warning over Rome’s initial budget plans, and that a decision would likely emerge on Tuesday.
“We have now got all the draft budgets of the member states in the eurozone and the commission is evaluating them and having exchanges, seeking additional information from a number of member states, and these contacts take various forms,” the spokesman said. “I can confirm that the Italian government response has just arrived ... Tomorrow the college [of commissioners] will discuss the procedure and it will determine the subsequent stages.”
Italian bond yields fell on Monday afternoon, indicating that investors were not alarmed by the latest developments. The yield, or interest rate, on 10-year Italian government debt hit a four-year high of 3.8% last week. On Monday the yield fell below 3.5%.
Giovanni Tria, the Italian economy minister who has come under pressure from the two deputy prime ministers, Matteo Salvini and Luigi Di Maio, to set a higher deficit target, said in the letter to Brussels that the plans “did not expose Italy’s financial stability or that of any other EU countries to risk” and that bolstering Italy’s economy would benefit the rest of the EU.
Although the planned deficit does not exceed the EU’s 3% ceiling, the commission told Italy last week that the difference between the 1.8% set by the previous administration and 2.4% was “unprecedented in the history” of EU budget rules. Conte reiterated the government’s commitment to reducing the target in 2020 and 2021, saying that 2.4% is the highest it would go.
He said the financial manoeuvres would help Italy’s economy to take off, with the government forecasting growth of 1.5% over the coming year, compared with 1% predicted by the Bank of Italy and the IMF. Italy’s public debt currently stands at around 131% of GDP, the second-highest in the eurozone after Greece.
Conte said the letter was intended to explain the government’s strategy, which includes structural reforms, making investments and simplifying bureaucracy and fiscal procedures.
“We wanted to explain why we are doing things this way and what our objectives are,” he added. “We want a constructive dialogue, and for this to take place in the spirit of collaboration.”
If the commission rejects the budget, he said, the government was willing to “sit around the table and assess things together”, but any prejudice beforehand would be “unacceptable”.
Pierre Moscovici, the commissioner for economic affairs, who was in Rome last week, said on Monday that member states in the eurozone needed to respect the joint rules.
“The European commission does not want a crisis between Brussels and Rome,” he told France Inter radio. “My state of mind is that of constructive dialogue.”
An Ipsos poll on Sunday revealed that around 59% of Italians support the budget, with many believing that higher public debt would help to trigger growth.
But neither Tria nor Conte are perceived in Brussels as having the political clout or power to be able to engage in reaching a compromise around complicated technical rules.
“There is no room for compromise here, as was indicated in the first letter sent by the commission last week,” said Wolfango Piccoli, the co-president of Teneo Intelligence, a research firm in London. “The deviation is too big. What they’re talking about economically is not credible and doesn’t make sense. It’s not the kind of plan that Brussels can take seriously. We will most likely see a follow-up letter from the commission asking for a revised budget.”
