The European Commission will take the unprecedented step of rejecting a national budget later this month if the Italian government does not improve its announced deficit figures, EU officials told EURACTIV.com.
Following comments made in Brussels on Monday (8 October) by Italy’s far-right interior minister, Matteo Salvini, the clash between the EU executive and Rome is now seen as unavoidable.
Lega leader Salvini told reporters that “Europe’s enemies are those cut off in the bunker of Brussels… the Junckers, the Moscovicis, who brought insecurity and fear to Europe and refuse to leave their armchairs.” He referred to Commission President Jean-Claude Juncker and his Commissioner for economic affairs, Pierre Moscovici.
The Commission wrote to Italy’s economic chief, Giovanni Tria, last week, expressing “serious” concerns about the national budget which plans to increase spending and deficit.
Italian deputy prime minister Luigi Di Maio responded that they will “not retreat” on spending plans.
As a result, EU officials said the Commission would issue a negative opinion once Rome sends its draft budgetary plan, given the significant breach of the Stability and Growth Pact, the EU’s fiscal rulebook.
Italy announced that its deficit would reach 2.4% of GDP next year, three times higher than the target announced by the previous government.
In addition, Rome does not plan any structural adjustment requested by Brussels to cut down its massive pile of public debt, which reaches 132% of GDP, second only to Greece in the EU.
Officials told EURACTIV that given the risk of serious non-compliance with EU rules, the Commission will strictly follow the procedure in order to protect the credibility of the Pact.
Following the submission of Italy’s draft budgetary plan by mid-October, the EU executive will have one week to launch a last-ditch attempt to iron out its differences with Italy.
If positions remain entrenched, the EU institution will issue a negative opinion on the Italian budget two weeks after receiving the draft plan.
Following the negative verdict, the Italian government, currently led by the populist Five Star Movement and the far-right Lega, would have three weeks from that moment to submit a new budget for 2019.
If the Italian government refuses to change course, the Commission will recommend reopening an excessive deficit procedure against the country. EU member states would have to give the green light to this procedure, setting a fiscal path for Italy to balance its public accounts.
This would be the first time that the EU executive sends back a national budget for redrafting since post-crisis rules entered into force.
Tensions between Rome and Brussels will continue to increase as credit rating agencies prepare to review their appraisal of the Italian economy.
Moody’s, which has a negative outlook on Italy’s Baa2 rating, said it would release a new assessment by the end of this month. Standard & Poor’s, which rates Italy’s debt “BBB” with a stable outlook, is scheduled to publish its new rating on 26 October.
The war of words launched by Salvini and Di Maio has already made European markets tumble. In Milan, stocks fell 2.3% in early trading on Monday (8 October). The risk premium on the Italian 10-year bond soared once again and surpassed 300 bps compared with the German obligations, the reference for investors.
EU officials now seek to avoid any risk of contagion of the Italian debt crisis to other European economies. In this context, EU sources praised the efforts made by the Spanish government to show its commitment to budgetary stability.
Italy and Spain, the third and fourth largest economies of the eurozone, were among the victims of financial market turbulence in 2012. Spain was forced to request a bailout for its banking sector to avoid a fully-fledged rescue programme.
On Monday, the yield gap between Italian and Spanish bonds reached its widest in over 20 years, at 203 bps.