Monday

25th Oct 2021

Italy on course for new EU budget clash

  • Italian prime minister Giuseppe Conte called the EU forecast 'prejudiced' (Photo: Consilium)

Clashes on Italian overspending will shortly return to the EU centre stage, if the European Commission's gloomy forecast comes true.

The Italian budget deficit is set to jump to 3.5 percent of GDP next year - breaking the EU red line of 3 percent, the commission predicted on Tuesday (7 May).

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Its debt pile will also peak at 135.2 percent of GDP compared to the EU limit of 60 percent.

The likely scenario comes amid predictions of GDP growth of just 0.1 percent this year - the lowest in the EU.

Employment is also expected to dip by 0.1 percent and investment by 0.3 percent amid growth everywhere else in the bloc on both fronts.

At the same time, the Italian government is splashing out on a new basic income for all its citizens and on pension reform.

And if markets get spooked, raising the cost of Italy's borrowing, that might plunge Italy even further into the red, the commission warned.

"Renewed tensions on sovereign yields constitute a risk to these fiscal projections," it said.

The bad news comes after Brussels and Rome did a deal on its fiscal plans last December.

But the lower than expected growth puts that deal in doubt, raising the prospect of a fresh clash between EU officials and Italy's populist government after the European Parliament elections in May.

The Italian finance minister, Giovanni Tria, already called the forecast "more political than economic" speaking at an event in Paris the same day.

Italian prime minister Giuseppe Conte said in Milan that the prediction was "prejudiced".

The 5 Star Movement party in the ruling coalition went further, with a group of MPs saying: "The objective is clear - to strike at a government that is hostile to the diktats of Brussels and which wants to champion the interests of the Italian people".

The "false" estimates and "threats of sanctions" will have no effect, it said, and "on 26 May the citizens will reject the Brussels bureaucrats", it added, referring to the upcoming European Parliament elections, where populist parties are polling to do well across Europe.

Meanwhile, the EU commission also forecast that the eurozone's economy would grow by 1.2 percent this year and 1.5 percent next year.

Malta, Poland, and Ireland were expected to grow the fastest, while Belgium and Germany joined Italy at the bottom end.

The figures were slightly down compared to its last prediction, out in February, amid warnings of a slowdown in the Chinese economy and of potential trade wars between the US and the EU and China.

But it played down the risks associated with Brexit.

Even a no-deal British departure "would dampen economic growth, particularly in the UK but also in the EU-27, though to a minor extent", it said.

"Risks to the outlook remain pronounced," the EU commission's vice-president Valdis Dombrovskis said.

"These include further escalation of trade conflicts and weakness in emerging markets, in particular China. In Europe, we should stay alert to a possible no-deal Brexit," he added.

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