Finance ministers from the 19 eurozone countries will review public spending in the region on Thursday (16 May), with Italy once again in the spotlight amid an ongoing economic slowdown.
The Eurogroup discussion comes after the latest downward revision of the eurozone’s growth forecast, published by the European Commission last week.
And while the German economy returned to growth in the first quarter, expanding its GDP by 0.4% during the first three months of the year, it barely escaped recession in 2018.
Ministers are not expected to scrutinise member states’ finances yet, waiting until the Commission publishes its recommendations on 5 June.
Instead, the Eurogroup will assess the overall fiscal stance of the euro area, after the EU executive noted it had become slightly expansive.
The Commission warned that additional public expenditure was coming mostly from countries without any fiscal space – France, Italy – while other countries like Germany and the Netherlands were urged to boost their public spending in order to fuel the economy.
Italy is the most worrying case for European decision makers.
According to the Commission, Italy is expected to grow by only 0.1% this year and 0.7% in 2020. Taking into account Rome’s latest announcements, the deficit is expected to reach 3.5% of GDP in 2020, well above the EU’s 3% threshold.
The political instability caused by tensions between the coalition partners, Five Star Movement and Lega, further complicates the control of public finances in the third largest eurozone economy.
Italian deputy prime minister and Lega chief, Matteo Salvini, triggered market turbulences when he said on earlier this week that he was ready to breach EU rules limiting national deficits and public debts.
“If there are European rules that are starving a continent, these rules must be changed,” he told reporters on the sidelines of a meeting with business representatives in Rome on Wednesday.
European and national officials said that the Italian case could come up during the Eurogroup discussion.
But Italy is not the only country in the crosshairs. The Commission also told France, Belgium and Spain to adopt additional measures in order to balance their public expenditure, especially given their high level of public debt.
Meanwhile, Spanish official ruled out the possibility that the Eurogroup will focus on the Iberian economy at this stage.
Spain, whose structural deficit is the largest one in the eurozone (€36 billion), and Italy were under the spotlight during the eurozone crisis in 2012 as the two largest vulnerable economies.
But Spain has remained attractive for investors, with the market valuation of its debt remaining stable over the past months, despite the Italian turmoil.
“Our concern is relative,” said a Spanish official. The source was confident that the markets would continue to distinguish the two economies, but was concerned about the stability of the eurozone as a whole if the situation worsened in Italy.
No blame game
Italy’s larger-than-projected fiscal slippage preludes a new battle between Rome and Brussels.
Some countries, especially the Netherlands, believe that the Commission was not strict enough last December, when it let the Italian government got away with breaching EU fiscal rules, in exchange for some last-minute promises to control expenditure.
But the Netherlands is not expected to raise this issue during the Eurogroup, according to a Dutch diplomat.
“We won’t tell the Commission ‘I told you so!’” the official said. But the source added that it is becoming “very difficult” to convince Dutch voters about additional fiscal transfers in the eurozone if the Commission is not a “credible” enforcer of common rules.
For some, the Italian case is linked with the new fiscal instrument to support the region. The ministers will hold the final discussion on the main features of the new budgetary capacity for the euro area also on Thursday.
Despite progress made, member states still disagree on whether the new instrument should limit itself to incentivising reforms and boosting investment in some areas, as the Netherlands and a few other countries want; or also act as a stabilisation tool to absorb sudden economic shocks, as advocated by another camp, led by France and Spain.
EU leaders tasked the Eurogroup with agreeing on the main features of the new budgetary capacity by June.
However, the new instrument will be far from the eurozone budget worth “several points” of the eurozone GDP that French president Emmanuel Macron had defended.
[Edited by Zoran Radosavljevic and Frédéric Simon]