The solution offered to the European Commission is not ‘ideal’ but Italy’s efforts are sufficient to avoid the launch of the excessive deficit procedure, the EU executive announced on Wednesday (19 December).
The Commission and the Italian government clinched a compromise on Rome’s hotly contested budget plan after two intense weeks of talks.
Italy’s final budget proposal for 2019 was set out by Italian prime minister Giuseppe Conte and Finance Minister Giovanni Tria in a letter sent to the Commission on 18 December.
“We take good note of the fiscal measures you intend to table in an amendment to the draft budget law, as communicated to us in your letter,” the Commission replied in another letter sent today to Italy’s government and signed by President Jean-Claude Juncker, and Economics and euro commissioners Pierre Moscovici and Valdis Dombrovskis.
“Subject to the adoption of these measures, including the envisaged safeguard clause (‘freezing’ mechanism), as part of the final budget law to be voted by the Italian Parliament before the end of the year, this would allow the European Commission not to recommend the opening of an Excessive Deficit Procedure at this stage,” they added.
The European Commission first sent a letter to Tria in October, arguing that the Italian draft blueprint represented an “unprecedented breach” of the Stability and Growth Pact.
Rome initially refused to change the budget, presenting a new proposal only after Dombrovskis and Moscovici called for the opening of an excessive deficit procedure against Italy on 21 November.
‘Not ideal’ deal
“The compromise is not ideal, particularly because it does not yet deliver a long-term solution to Italy’s economic problems, but certainly is a step in the right direction,” said Dombrovskis.
However, the EU executive will continue to monitor the Italian government.
“The deadline for a Council decision to activate the procedure is still February,” warned Dombrovskis, adding that if Rome deviates, Commission will consider restarting disciplinary action.
Commissioner Pierre Moscovici, who held the press conference together with Dombrovskis, tried to soften the edges, saying that “being vigilant does not mean being suspicious.”
On Wednesday, Conte presented the final draft of the budget as agreed with the Commission to Italy’s upper house, saying that there was “no surrender” and that the final version sticks to a higher deficit than that deemed appropriate by Europe.
Structural deficit, the key
The Commission accepted Italy’s proposal to lower the budget deficit to 2.04% of GDP from the 2.4% included in the earlier draft.
However, the ‘borderline’, as it was considered by Dombrovskis, was a structural deficit decrease, that Italy agreed to cut to 0% from the increase of 0.8% included in its previous proposal.
The original draft budget presented in October proposed a structural deficit increase of 1.2% , making clear that this “no change” compromise can be considered a big victory for the Commission.
Rome agreed to cuts worth a total of €10.25 billion, while the Commission granted €3.15 billion of flexibility that will exclude the money earmarked for two national plans – currently under preparation – from budget deficit calculations. One regards a justice reform aimed to reduce the length of criminal and civil trials, the other one is an infrastructure plan for preventing risks related to hydrogeological instability.
According to some Italian media, the government saved roughly €4 billion by reducing the beneficiaries, and by postponing to 1 April, the entry into force of the two most contested measures, the so-called universal income and the overhaul of the pension system.
Dombrovskis, however, announced that the costs of these two measures will be covered by the VAT safeguard clause.
As part of the compromise, Italy also agreed to lower the 2019 GDP forecast to 1% from 1.5% next year
‘We cannot ignore the context’
“It was the victory of the dialogue,” said Moscovici.
He also said that the Commission didn’t take into account the upcoming EU elections, but they had considered the perception that a punitive attitude towards Italy would have across Europe.
“We cannot ignore the context,” he said mentioning a “European atmosphere” and particularly the rise of populism and of the anti-austerity sentiment. These arguments led to the ‘strategic choice’ of preferring dialogue to punishment.
According to Moscovici, member states within the Eurogroup appreciated the commitment of the Commission in reaching a deal.
He denied that Commission adopted a dual standard in dealing with Italy’s budget and France’s request to go over 3% of deficit/GDP ratio to face yellow vests protest: “We are not fining Italy for its nominal deficit of 2.04% and saving France for its deficit at 3.2%.”