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16th Nov 2018

EU commission rejects Italy's budget plans

  • Italy's premier Conte said there is no plan B to his original budget (Photo: Consilium)

In an unprecedented step, the EU commission on Tuesday (23 October) asked the Italian government to resubmit its budget plan for 2019 because it broke EU rules, euro and economic commissioners said in Strasbourg.

Italy has three weeks to send new proposals to Brussels, or risks disciplinary action by fellow member states.

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The European Commission had never before used its new powers, obtained in 2013 during the financial and debt crisis, to reject eurozone budget plans if they risked the stability of the single currency.

"Today, for the first time, the commission is obliged to request a euro area country to revise its draft budgetary plan," Valdis Dombrovskis, commission vice-president of the euro told reporters. "We see no alternative," he added.

Dombrovskis said the clarifications the Italian government had sent after the commission earlier voiced its concerns were not adequate.

"The Italian government is openly and consciously going against commitments it made," he said.

The EU executive now expects Italy to send a revised plan that was in line with the decision of finance ministers from July and to cut its structural deficit, which strips out the effects of the economic cycle and one-time spending, by 0.6 percent of GDP.

Rome's plans would increase it by 0.8 percent.

The commission called Italy's deviation from the rules "unprecedented".

A major concern for the euro area is Italy's public debt burden that would only increase thanks to the planned boost in spending by Italy's populist governing coalition.

Italy's debt-to-GDP ratio was at 131.2 percent in 2017, the second highest in the euro zone after Greece, which endured years of austerity to rein its deficit and debt.

Under EU rules, no country should have a budget deficit larger than 3 percent of GDP or debt above 60 percent.

Dombrovskis warned Rome that while more spending gives the illusion of breaking free, and it might be tempting to cure debt with more debt, but it was a slippery slope to losing financial sovereignty.

"You end up with no freedom at all," he said.

He said Italy was already spending as much on servicing its debt as it did on education - an average burden of €37,000 per year per capita.

The EU's economic commissioner Pierre Moscovici, who himself was accused of pushing EU fiscal rules in his former role as French finance minister, said that "debt is the enemy of the economy and the people".

In an attempt to tone down an expected anti-Brussels backlash from Rome, Moscovici reminded Italy's government that the commission has given it financial help on migration and environmental disasters and that Italy was the second largest beneficiary of the EU's structural funds until 2020.

The EU rebuke came after Italy's government clashed with the commission and some member states on migration, while the country's bellicose interior minister, Matteo Salvini, floated the idea of Italy leaving the euro.

Italy's premier Giuseppe Conte tried to calm fellow EU leaders about his government's budget plans last week at an EU summit.

On Tuesday, Conte said that "there is no plan B" to the budget plan already submitted. "Economic growth is the best way to get out of the debt trap," he argued.

The commission is in a difficult situation as it would want to avoid a head-on confrontation with Italy's governing coalition ahead of European elections next May, giving fuel to Salvini's populist League party.

There was an expectation that a negative reaction from markets would push Italians into making concessions.

The market reaction to Italy's budget has been moderate so far, but that could change as the European Central Bank phases out its bond-buying programme in December.

EU leaders worried about Italy's budget

Some EU leaders warned that Italy's plan to boost its budget spending despite the second largest debt in the eurozone, could hamper efforts to reform the single currency's framework.

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