For the first time ever in the history of the Stability and Growth Pact, the European Commission on Tuesday 23 October asked Italy to present a new draft 2019 budget within three weeks, as the initial draft presents a significant risk of deviating from the structural deficit adjustment required (not including cyclical effects).
“Today, the Commission is obliged to request a euro area country to revise its draft budgetary plan”, the European Commissioner for the Euro and Social Dialogue, Valdis Dombrovskis, confirmed with regret.
This decision, taken following the weekly meeting of the College of Commissioners, does not, however, come as a surprise.
The draft finance bill submitted by Rome on Monday 15 October anticipates that the structural deficit will grow by 0.8% of GDP next year, even though Italy is supposed to reduce it by 0.6% of GDP in order to comply with the rules of the preventive arm of the Pact (see EUROPE 12111). This gives a difference equivalent to 1.5% of Italian GDP.
We are looking at a clear, confirmed deviation that is supported and even demanded by some, said the Commissioner for Economic and Financial Affairs, Pierre Moscovici.
The Commission's letter which was handed over to the Italian authorities by the Commissioner in person last week, changes nothing, as the Italian government has stuck to its guns since then. In a letter dated Monday 22 October, it explains that it is aiming to kickstart growth via public spending (relaunching purchasing power and increasing investments) to return to pre-crisis growth levels and ultimately reduce the debt/GDP ratio (see EUROPE 12122, 12121).
“Unfortunately, the clarifications were not convincing”, said Dombrovskis.
To justify their decision, the Commissioners reiterated the size of government debt in Italy, which represents an average of €37,000 per head of population. The total costs of servicing the debt represented €65 million last year, “the same amount as is dedicated to education”, they noted.
The Italian government debt ratio is expected to represent 130.7% of GDP in 2018, according to the Commission's spring economic forecasts (see EUROPE 12114).
Three weeks to present a new plan
The government of Giuseppe Conte now has three weeks to present a new draft budget for next year.
“They do not necessarily have to use all of that time”, Moscovici nonetheless clarified. “We will analyse it and prepare a new opinion”, he explained.
Rome may very well decide not to change tack. On the same day, Conte told the news agency Bloomberg that the Italian government had “no plan B”.
If Italy maintains a position in flagrant breach of the rules of the preventive arm of the Pact, the Commission will be forced to review its position, which it reiterated in the spring, that it is not necessary to open excessive deficit procedures against Italy for failing to respect the debt criterion.
This was not the official line shared with the press on Tuesday. “Let's move step-by-step”, Moscovici said.
As a sign of their hopes of reaching an agreement with Rome, the Commissioners stressed the need for dialogue with the Italian authorities. “Today is not the end of the story”, Moscovici stressed.
Italy digs in its heels
Senior members of the Italian government lost no time in responding to the decision.
“We are not going to give up. We know that we are on the right tracks. This is why we will not stop”, said one of the two deputy prime ministers, Luigi di Maio, on Facebook (our translation).
“This changes nothing. Whatever the speculators may say, we are not going backwards”, Matteo Salvini, the other deputy prime minister, told the press during a trip to Romania, according to AFP. (Original version in French by Lucas Tripoteau)