Tensions between Italy, EU ratchet up over budget rules

Matteo Salvini has issued defiant statements to the EU. - Copyright REUTERS/Leonhard Foeger

Published on 02/10/2018 - 16:22

Italy revealed it's aiming for a 2019 budget deficit of 2.4% of gross domestic product — significantly higher than the 1.6% previously announced.

Tensions between Italy and the rest of the European Union have been ratcheting up as both camps prepare to clash over Italy's 2019 budget proposal.

European Commission President Jean-Claude Juncker said Italy's proposed budget — which the country must submit for approval by October 15 — could spell "the end of the euro."

Italy's Deputy Prime Minister, Matteo Salvini, riposted that the EU "will not stop" his government, suggesting it might even seek reparations over the escalating war of words's impact on Italian financial markets.

Italy's budget

The clash between the two sides started last week after Italy's Finance Minister Giovanni Tria, announced that Italy would aim for a 2019 budget deficit of 2.4% of gross domestic product (GDP).

That's significantly higher than the 1.6% Tria had previously announced and three times higher than the previous government's target.

In the EU, the Stability and Growth Pact requires countries to keep their deficit under 3% of GDP and to target a debt-to-GDP ratio of 60% — the first metric compares a country's income to its expenditures while the second one compares what a country owes with what it produces.

If they fail to reach these metrics, they can then fall under EU surveillance and have to comply with EU decisions on how best to tackle the debt.

According to Eurostat, the Italian budget deficit stood at 2.3% last year and its debt totalled 132% of GDP.

Italy — whose populist government has vowed to go on a spending spree to lower the retirement age, cut taxes and invest in infrastructure — argues however that it will still be able to lower its debt despite a higher budget deficit. It projects that the country's 2019 growth will comfortably outperform Brussel's estimates.

The European Commission expects Italy to grow by 1.3% this year and 1.2% next year. It grew by 1.5% last year.

'End of the euro'

Few across the Union seem to believe it will be possible for Italy to achieve such growth.

"Recent announcements by the Italian government have raised concerns over its budgetary course, concerns that need to be addressed soon," Portugal's Finance Minister, Mario Centeno, said Monday following a meeting with his eurozone counterparts.

Centeno, who also serves as the Eurogroup president, added: "We are all bound by the euro and we need sound policies to protect it. It is up to to the Italian government to show it has a sustainable and credible budgetary plan."

Ahead of the meeting, France's Finance Minister, Bruno Le Maire, had also warned Italy that "there are rules, and rules are the same for every state.

"Because our futures are linked, the future of Italy, France, Germany, Spain, Luxembourg, all the members of the eurozone are linked," he added.

Over in Brussels, EU Economy Commissioner Pierre Moscovici warned Italy's ruling Five Star and League parties that their decision could ultimately hurt them politically.

"What I note is that the Italian government seems to prioritise public expenditure. Well, public expenditure can make you popular in the short term...but in the end you have to be honest about who pays. It's always the citizens who pay," he said.

But Juncker issued the starkest warning, saying that "further special treatment" from the EU Commission regarding Italy's budget could precipitate the country into a Greek-style crisis and threaten the entire bloc.

"One such crisis has been enough," Juncker said.

"If Italy wants further special treatment, that would mean the end of the euro. So you have to be very strict," he added.

'They will not stop us'

The various comments did not go down well in Italy with Salvini, who leads the right-wing, eurosceptic Northern League party.

"In Italy no one drinks the threats from Juncker, who now associates our country with Greece. Our citizens' rights to work, security and health are the government's priorities and we will go all the way. They will not stop us," he wrote on Twitter.

The war of words has also had a negative impact on the country's ability to finance itself with bond yields rising to several-months highs.

In a statement, Salvini blamed Juncker and "other high EU bureaucrats" for the widening spread between Italian benchmark bonds and their German counterparts.

"We are ready to seek damages from those who want to harm Italy," he added.

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