Italy’s ‘unprecedented’ breach of fiscal rules clouds euro summit

Italian Prime Minister Giuseppe Conte. [Ettore Ferrari/EPA]

Euro-area leaders agreed on Thursday (18 October) to accelerate the work to bolster the monetary union as the European Commission questioned half a dozen member states’ efforts to balance their public accounts, particularly Italy.

In a letter addressed to the government led by the populist Five Star Movement and far-right La Lega, the Commission accused Rome of an “unprecedented” breach of the Stability and Growth Pact.

EU leaders took stock of the efforts to complete the banking union and to reinforce the European Stability Mechanism (ESM), the EU’s anti-crisis fund.

Despite the EU members watering down their ambition by postponing the discussion of a European deposit guarantee scheme and a new stabilisation instrument, member states are finding difficulties to agree on details such as the process to activate a fund to resolve ailing banks.

“We agreed that we need to accelerate the technical work”, said European Council president Donald Tusk after the euro summit.

He added that the aim is to “keep up the momentum for change” to conclude an agreement on the banking union and the ESM in December.

Speaking alongside Tusk, Commission President Jean-Claude Juncker recalled that the institution had presented around 40 proposals to bolster the economic and monetary union, but only six or seven have been adopted.

“There is no sense of urgency but it is urgent”, he stressed.

The euro summit followed the submission of eurozone member states’ draft budgetary plans to the Commission this week for its blessing.

However, the EU executive was expected to send letters to a handful of national governments questioning their efforts to fulfill the Stability and Growth Pact, the EU’s fiscal rules that set limits on deficit and debt levels.

Unprecedented deviation

Brussels is particularly concerned by Italy’s planned overspending next year. The country’s disregard for the EU’s fiscal recommendations and the size of the deviation are “unprecedented in the history of the Stability and Growth Pact”, according to Commission’s letter.

The country was expected to approve an adjustment worth 0.6% of its GDP, but instead, its budget will be expansive of around 1% of GDP. Its deficit will reach 2.4% of GDP next year, compared with 0.8% of GDP targeted by the previous government.

Rome would not follow the fiscal path to reduce its public debt of around 130% of its GDP.

The Commission also pointed out that the draft budget has not been endorsed by the Parliamentary Budget Office.

For those reasons, the letter concluded that these factors point to a “particularly serious non-compliance” with the fiscal rules.

EU sources warned that if the government did not amend the fiscal path, it would send back the draft plan by the end of the month.

Juncker said that Italian prime minister, Giuseppe Conte, presented the national budget “with disposition”.

“We will examine it with the same rigour and flexibility that we assess the other budgets”, he added.

But he recalled that in the past the Commission was “very kind” with Rome and it was accused of being “too indulgent” with Italy.

Leaders’ concerns

Leaders did not react inside the closed-door meeting to Conte’s presentation. However, some of them bluntly criticised the Italian proposal and supported the Commission in the application of the rules.

“We do not understand at all the Italian budgetary proposal,” said Austrian Prime Minister, Sebastian Kurz, whose country is chairing the EU’s rotating presidency.

”Austria is certainly not going to pay someone else’s debt and certainly not for campaign promises of leftist populists,” he added.

Dutch Prime Minister Mark Rutte told his “concerns” to Conte in regards to the Italian budget in a bilateral meeting. And he expressed his “full support” to the Commission in applying the obligations of the Stability Pact.

Other letters

Meanwhile, Spain’s prime minister Pedro Sanchez did not want to cast judgement

Spain is one of the countries that will receive a letter tomorrow, according to EU and Spanish officials.

But the Commission also doesn’t trust the plans made by other countries to balance their public accounts. France, Belgium and Portugal could also receive letters, according to El Mundo.

However, as senior Spanish officials admit, the Spanish case is special as the country is the only one that remains in the excessive deficit procedure, the EU’s ‘red zone’ in fiscal supervision.

In addition, the Commission is expected to question the budgetary impact of some of the measures announced by Sanchez to reach the structural effort of 0.4% included in his draft budget.

The EU executive is expected to demand that Madrid submit the final draft of the budget submitted to the Parliament, in order to assess whether the pledged adjustment worth around €5 billion would be fulfilled.

EU officials said that Italy was “a case apart”. The same sources explained that in some cases the Commission contacts member states to clarify a few points of the budget plans.

Sanchez told reporters after the summit that its draft budget is backed by Spain’s independent fiscal authority and has the “trust” of the EU institutions.

He met with Juncker on the eve of the euro summit.

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