The Italian government has no immediate plans to change its controversial draft 2019 budget, but has stated that it is prepared to take all measures necessary to comply with the new budgetary trajectory laid down and keep Italy in the Eurozone, the Italian finance minister, Giovanni Tria, said in his response to the request for information made by the European Commission last week.
This letter responds to one handed over in person by Pierre Moscovici, the Commissioner for Economic and Financial Affairs, to Tria, in which the Commission calls upon the government of Giuseppe Conte to answer its questions about the Italian budgetary trajectory for next year (see EUROPE 12121, 12120).
The Commission is particularly concerned at Italy's ability to support growth and the level of its debt and structural deficit (not including cyclical effects) for 2019.
The draft Italian budget submitted to the institution in mid-October anticipates that the structural deficit will increase by 0.8% of GDP next year, even though the previous Italian government had undertaken to trim it by 0.4% of GDP and it is supposed to be reduced by 0.6% of GDP under the rules of the preventive arm of the Stability and Growth Pact (see EUROPE 12111).
Although it has not yet come to open warfare with Rome, the European leaders and the Commission – first and foremost its President, Jean-Claude Juncker – have expressed grave concern at this budgetary trajectory (see EUROPE 12116).
However, these concerns seem to have had little effect on the Italian government, which stresses that it is aware that it has chosen a budgetary policy approach that does not comply with the rules of the Pact.
However, Tria argues that this approach is necessary, because growth in Italy has not returned to pre-2008 crisis levels and the most vulnerable categories of the population are still suffering from the situation.
The deviation of the structural deficit from the trajectory applies for 2019 and will not be made any worse over the two years after that, he stresses. The government could possibly speed up its structural debt reduction at a later stage, should GDP return to pre-crisis levels.
Effectively, the Italian government's strategy is to kick-start growth, for instance by resuming public investments. It calculates that increasing the government deficit by 1.2% of GDP will stimulate extra growth of 0.6% of GDP and hence allow a positive development of the debt/GDP ratio.
This line is, moreover, one that is clearly shared across the whole government, as indicated by Conte's comments to the press on the same date. “We are not a band of hotheads. If we had adopted a different finance bill, we would have gone into recession”, he said, AFP reports.
The end of Tria's letter seeks to be a bit more mollifying, expressing the Italian government's hopes of continuing constructive and fair dialogue with the Commission. If deficit and debt do not develop as anticipated, it pledges to take measures to ensure that the new targets set are achieved. Italy's place is in Europe and in the Eurozone, he concludes.
The next few days will be decisive. This answer is unlikely to satisfy the Commission.
The meeting of the College of Commissioners in Strasbourg on Tuesday 23 October could be decisive in this matter. The European institution could ask Rome to present a new budget, something that has never happened before in the history of the Stability and Growth Pact.
A decision on the budget could also be made later, between now and 30 October, following written adoption.
If Rome was asked to present a new draft budget, the Conte government would have three weeks to respond.
If it chose confrontation, Italy could decide not to change its stance, which would force the Commission to recommend that the Council open an excessive deficit procedure against it for failing to respect the debt criterion. This is expected to stand at 130.7% of GDP in 2018, according to the Commission's spring forecasts.
The Italian letter can be consulted at: http://bit.ly/2NVUPhy. (Original version in French by Lucas Tripoteau)