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26th Jan 2020

EU commission puts Italy on spot over growing debt

  • Commissioners Valdis Dombrovskis, Marianne Thyssen and Pierre Moscovici at Wednesday's press conference on Italy (Photo: European Commission)

The EU commission on Wednesday (5 June) said Italy was in breach of EU fiscal rules because of its increasing debt, paving the way for EU member states to launch a disciplinary procedure against Rome.

Italy's debt stands at 132 percent of GDP this year, double the permitted limit under EU fiscal rules, and the second-highest in the bloc after Greece.

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It rose from 131 percent in 2017, and the EU executive estimates that it will grow up to 135 percent in 2020 - breaching EU rules that say it must go down.

Rome disagrees, it expects the debt to increase this year to 132.6 percent of output, and decline to 131.3 percent in 2020.

Italy narrowly averted a recommendation for disciplinary actions in December, after a similar assessment by the commission and following a last-minute deal with the commission, in which Rome committed to a lower deficit this year.

However, Italy's populist interior minister Matteo Salvini and his League party now feels less inclined to stick to any compromise after its massive win at the European elections last month.

The commission said that the disciplinary process could be stopped if Rome made sufficient fiscal commitments to cut the debt.

'My door is open'

"We are ready to look at new data that could change this analysis. My door is open," EU commissioner for the economy and tax, Pierre Moscovici said, adding he is open to fact-based debate over possible measures to avoid the probe.

"To be clear, today we are not opening the excessive deficit procedure," EU commissioner for the euro Valdis Dombrovskis told journalists on Wednesday and said EU member states need to agree.

"But it's much more than just about the procedure, when we look at the Italian economy we see the damage that recent policy choices are doing," he added, pointing to interest expenditure with Italy being the slowest growing economy in the EU.

"Italy needs to reconsider its fiscal trajectory. [...] It is first and foremost important for Italy," Dombrovskis said.

The commission estimates that Italy paid last year €65bn in interest, "as much as for the entire education system," he said, adding growth almost came to a halt.

The commission was keen to avoid a head-on clash with Italy's populist government before, fearing it could further boost eurosceptic votes across Europe, but after the election failed to bring a populist breakthrough at EU level, the political risk is now less.

The EU executive's decision now paves the way for finance ministers to decide on the disciplinary procedure in July.

First, EU member states have to agree with the commission's assessment that Italy is breaking EU rules. Then next month finance ministers can recommend the start of the process formally.

Under the procedure, Italy will be required to adopt measures to correct the debt curve, such as higher taxes and spending cuts.

Market pressure

The procedure could lead to financial sanctions on Italy, to be recommended by the commission in July - which remains an unlikely option, with EU officials hoping increased market pressure on Italy will be sufficient to get Rome to present plans on cutting the debt.

The commission's opinions also noted that the International Monetary Fund said Italy's debt was a major risk to the eurozone economy, along with global trade conflicts and a possible hard Brexit.

The commission's proposal comes under its role of monitoring EU economies and budgets if they stick to commonly agreed rules and targets.

The EU executive said Italy's debt is growing because interest rates Rome has to pay to service it are increasing more than the country's growth rate.

One of the reasons for Italy's debt increase is Rome backtracking on a pension reform.

The commission said that the government's economic reform plan "contains only piecemeal measures" and "backtracks on elements of major reforms adopted in the past".

The commission said in its assessment that Italy had failed to carry out the agreed "adjustment path" for its public finances in 2018 and was "at risk of non-compliance".

Salvini triumphs in Italy

The League, Italy's far-right party, doubled its vote in European elections compared to the national elections in 2018, while the other governing party, the Five Star Movement (M5S), lost half of its voters.

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