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17th Feb 2019

EU commission warns Italy on budget, moves towards fines

  • Italy can come this far - commissioner Pierre Moscovici at the press conference (Photo: European Commission)

The EU Commission proposed on Wednesday (21 November) to put Italy under an economic disciplinary program after it said Rome's revised budgetary plans were in serious breach of EU rules.

The EU executive, after reviewing all 28 EU member states' budgetary plans, said it retains its earlier concerns about Italy's populist-coalition government's plans to boost spending.

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"Our opinion on Italy's revised draft budgetary plan confirms our initial assessment that it is in particularly serious non-compliance with the EU council's recommendation to Italy, which the government itself signed up to last July," finance commissioner Pierre Moscovici told reporters on Wednesday.

The commission had already rejected the first version of Italy's budget plan. Its new plan, which has not made significant changes, aims to increase the country's deficit to 2.4 percent of GDP in 2019.

The commission is worried that an increased deficit will make Italy's economy even more vulnerable, as its public deficit currently stands at 131 percent of GDP, the second largest in the EU, and twice the amount prescribed as a reference value by EU rules.

The EU is concerned that if the eurozone's third-largest economy cannot manage its debt, the entire eurozone will be in trouble - only a few years after the bloc has emerged from the euro-debt crisis.

The commission therefore called for a debt-based "excessive deficit procedure", an economic surveillance and disciplinary program for those EU countries that are over-spending.

Valdis Dombrovskis, commission vice-president for the euro, warned Italy risks uncertainty, which would increase lending cost for Italians, and in the end could lead to austerity.

'Sleepwalking into instability'

"We see a risk of the country sleepwalking into instability," Dombrovskis warned.

EU countries now have two weeks to decide if they agree that the launch of the procedure against Italy is warranted. Moscovici said he expected member states to agree with the commission.

Euro finance ministers then in January can officially declare Italy's deficit 'excessive', and adopt the commission's recommendations: asking Italy to amend its budget, reduce spending and borrowing, within three to six months.

Only if Rome then fails to comply can the commission - for the first time - apply financial sanctions, which can amount to fines up to 0.2 percent of GDP, plus the suspension of some EU funds.

Italy's coalition of populists and far-right parties sounded defiant on Wednesday.

Prime minister Giuseppe Conte said on Wednesday said that the budget plan is "excellent".

Conte said he would hold talks with European Commission president Jean-Claude Juncker on Saturday (24 November) and try to explain the budget further.

The commission was keen not to escalate tensions with Italy over the budget, with Moscovici stressing that Wednesday's announcement does not mean the launch of the procedure yet.

Brussels has already had several run-ins with Rome's new rulers, as League party leader and deputy prime minister, Matteo Salvini, has taken potshots at the mainstream "elite" of the EU, hoping to score big at next May's European elections.

The EU had also hoped that a nervous market reaction would force Italy to rethink its budget plan - but the markets have reacted to the commission news on Wednesday calmly.

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