On the evening of Tuesday 18 December, the European Commission and Giuseppe Conte's Italian government managed to agree on a new revision to the Italian draft budget plan for 2019 that provides for zero structural adjustment.
These negotiations have therefore enabled a provisional solution to be reached after the Commission rejected the first two draft Italian budgets for next year (see EUROPE 12123, 12142).
"This agreement is a victory for the political dialogue that the Commission has always preferred to confrontation," Pierre Moscovici, Commissioner for Economic and Financial Affairs, told the press on Wednesday 19 December.
This agreement means that the Commission has not recommended that the Council of the EU Council open an excessive deficit procedure on the basis of public debt.
The Italian government focused throughout on the nominal deficit rate, which is expected to be 2.04% of GDP next year compared to 2.4% of GDP in the first draft budget plans submitted to the Commission. But it is the structural deficit (excluding the impact of the economic situation) that matters for Italy, as it must comply with the preventive rules in the Stability and Growth Pact.
While the first two draft budgets forecast a decrease in the structural deficit of 0.8% of GDP next year (1.2% of GDP for the Commission), the agreement is based on zero growth for this structural deficit (0% of GDP).
It should be remembered that the rules of the preventive arm of the Pact allow for a reduction in the structural deficit of 0.6% of GDP per year, and the Commission allows flexibilities of twice 0.25% of GDP to be accumulated over the course of one year.
"We are borderline," as Valdis Dombrovskis, the Commissioner responsible for the euro, has acknowledged. However, he qualified this by saying that "this is an important step in the right direction", in comparison with the initial discussions between Rome and the organisation.
The Italian government is also now assuming GDP growth of 1% next year, compared to 1.5% just a few weeks ago.
On the public debt side, next year's forecasts have not been revised to take into account the latest estimates, with the Commission expecting debt to reach 129.2% of GDP. A reassessment is expected in the next economic forecast in spring 2019. There is no plan currently to re-draft the debt report under Article 126(3) of the TFEU ().
Safeguard clauses. Going into the details, Mr Dombrovskis pointed out that the additional Italian budgetary outlay compared to the first draft budgets now comes to €10.25 billion.
The date for the reform of pensions ('quota 100') and citizenship income to enter into force will be postponed. However, Mr Dombrovskis said that these reforms would generate "higher costs for the years to come" which will be offset by activating a safeguard clause in 2020 and 2021 that will result in an increase in value added tax.
Business tax increases and reduced investment will also be implemented, two measures that are "not conducive to growth", Dombrovskis noted.
Rome has also allowed for a safeguard clause for a €2 billion spending freeze in 2019, which will be activated if the Italian budget goes off track.
"It is now up to the Italian government to present its own budget items to the Italian Parliament, which will make its own sovereign decision," said Mr Moscovici. And if this draft budget is not approved by the Italian legislature, the recommendation to open the excessive deficit procedure can still be made by the Commission in January.
“There was one particular outcome we wanted to avoid. We have worked with the utmost determination to avoid the infringement procedure," said Italian Prime Minister Giuseppe Conte, giving the good news to the Italian Senate. (Original version in French by Lucas Tripoteau)