August 12, 2020

Brussels starts the process to sanction Italy's budget slip | Economy

The European Comission On Tuesday, it took the first step to submit Italy to a disciplinary procedure that could result in significant sanctions and even a cut in structural funds for not containing the public debt. Brussels on Monday sent a letter to the government of Giuseppe Conte in which he warns that the numbers at his disposal indicate "a significant deviation" of public debt for this year and next. In recent years, Italy had already been reprimanded by the community executive, but Brussels he had accepted the justifications provided by Rome. However, this year the European Commission seems willing to use this instrument to curb the tax expansion plans with which the Italian government has challenged community rules.

The letter – signed by Marco Buti, general director of Economic Affairs – starts by recalling that Italy is already warned by its draft Budgets, which is not "in line with the commitments presented" in its Stability Program of April 2018. The Commission returned the accounts to Rome and gave it three weeks to adjust them to the community rules. However, the document sent to the general director of the Treasury, Alessandro Rivera, focuses on the effects that fiscal policies and the slowdown in growth will have on the evolution of public debt.

The letter is, therefore, the prelude to the implementation of the mechanism to incorporate Italy into the corrective arm of the Commission. In this case, however, not because of its public deficit, but for not fulfilling its obligations to reduce the debt (of more than 130% of GDP) to the 60% set by the Stability and Growth Pact. "Italy's public debt remains a crucial vulnerability," says the European Commission.

30,000 million flexibility

In a statement, the Italian government has argued that Italy has received that same letter on other occasions. Until now, the Commission had always accepted the country's reasons. He recalls this the opinion of last October 23, which served as a basis to reject the accounts sent by the government of the M5S and the Lega. In that document, Brussels recalled that Italy has benefited from the flexibility mechanisms provided for in the Stability and Growth Pact, either alleging the existence of bad economic conditions, the implementation of structural reforms or investments, the refugee crisis or security threats. In total, avoided adjustments for 30,000 million euros-1.8% of GDP.

In fact, in this last letter, Brussels reminds that Italy has already closed 2017 with an indebtedness equivalent to 131.2% of the Gross Domestic Product (GDP). And that data, in his opinion, confirmed insufficient progress to meet the objectives set in 2017. Based on the draft delivered, Buti points out that "at first sight", the same will happen both in 2018 and 2019. "Given the size of the Italian economy, is a source of common concern for the whole of the euro zone, "he adds.

The Commission, then, on this occasion does not seem willing to follow the dynamics of other years and let go of the challenge launched from Rome. And he recalls that only one conclusion can be drawn from the plans sent to Brussels: that the deviation in the path of reduction of the 2017 public debt will continue this year and next. The reasons are the "fiscal expansion" projected for 2019 and the risks that the growth is not expected. Italy forecasts that next year it will expand by 1.5%. Today, however, the data of the third quarter of this year has been known, and the GDP of the country is not only slowing down, but it has remained stagnant.

The fiscal path, says Buti, "will be incompatible with the need to decisively reduce" the huge debt-to-GDP ratio. In accordance with Community rules, the Commission gives Italy the opportunity to justify this expansion of the public debt. But you probably should do it sooner. Specifically, in the Eurogroup next Monday, whose agenda is the discussion of draft budgets that member countries have sent to the Commission.


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