Eurozone finance ministers and the European Commission called on the Italian government on Monday (1 October) to respect the EU’s fiscal rules, as the “non-compliant” budgetary plan announced by the third largest eurozone economy could destabilise the region.
The cascade of warnings followed Rome’s announcement last week that it would miss the fiscal targets set by the Commission in order to reduce its massive pile of debt.
Italy said its deficit would reach 2.4% of GDP next year, compared with 0.8% targeted by the previous centre-left government to reduce its public debt of 132% of its GDP.
Speaking to reporters on his way into the Eurogroup meeting in Luxembourg, Italian Finance Minister Giovanni Tria said he would explain to his eurozone colleagues “what is happening and how the budget plan was formulated”.
He said that the ministers could stay “calm” because his government would reduce the debt levels next year, thanks to the economic growth.
But his colleagues were sceptical.
European Commission vice-president responsible for the euro, Valdis Dombrovskis, said the formal assessment would be made once Italy submits the draft budgetary plan in mid-October.
But based on what has been published, he said the Italian budget is “not compatible” with the Stability and Growth Pact, the EU’s fiscal rules.
The Italian budget was not part of the agenda of the Eurogroup. But the spat between Brussels and the Italian populist government, led by populist Five Star Movement and the far-right party La Lega, was “in everybody’s minds,” Dutch Finance Minister Wopke Hoekstra admitted on his way into the meeting.
Ministers recalled that the EU institutions were still waiting for the details, as Rome would have to submit its draft by mid-October, like the other euro area members.
“We should hold our horses,” added Hoekstra, as more information is needed to have a “clear opinion”.
However, the Dutch minister admitted that “the signals aren’t very reassuring”.
The Commission enforces the EU’s fiscal pact by setting fiscal targets and structural efforts for member states to balance their public accounts.
As a result, Italy should achieve a structural effort of 0.6% of its GDP by raising new taxes or cutting expenditure.
Although the Italian government’s announcement of the 2019 budget was vague on details, the populist government said it would increase social expenditure by including a universal basic income and would cut taxes.
Commissioner for Economic Affairs, Pierre Moscovici, said social expenditure is very popular but warned that increasing public debt means more euros allocated to paying debt interests and less for roads and hospitals.
Asked about the deviation of the structural effort, the French commissioner said that “we will see in detail how big it is and how it can be corrected.”
But he said that it was “very significant, or more than that”.
“The rules are there to be respected” because they are “fair and protective” for citizens, he insisted.
“We have a very clear set of rules, these are very important and should be observed by everybody because the stability of the eurozone depends on compliance with such rules,” said Cypriot Finance Minister Harris Georgiades.
His French colleague, Bruno Le Maire, said that if member states are in favour of strengthening the economic and monetary union, “we all shall stick to the commitments”, as the French government was now doing.
“I just want to make very clear that there are rules, and the rules are the same for every state because our futures are linked,” he added.
The dispute between Brussels and Rome is followed with concern by national governments. More importantly, investors are already requesting bigger returns to buy Italian debt.
But despite the market turbulence, other member states on the tightrope were not worried at this stage about any risk of contagion.
“There is no particular concern about any risk of contagion, which we don’t see anywhere”, said Spanish minister of finance, Nadia Calviño.
Following the arrival of the new Socialist government, Calviño met with Moscovici to present a new fiscal path. Spain is set to miss its 2.2% of GDP deficit target next year and will instead reach 2.8% of GDP.
But Calviño told the Commission that Spain would achieve a 0.4% of its GDP of structural effort, sufficient to achieve a draft budget “broadly compliant” with the EU’s fiscal rules.