Italy said on Thursday it would not change its budget plan although the European Commission said a day earlier it was launching excessive deficit procedure (EDP). If the EU member states agree with the commission's assessment, Italy will be asked to take corrective action. Sanctions are also possible at this point.
The European Commission rejected the first version of Italy's draft budget in October. However, the revised version, submitted in mid-November, was virtually unchanged.
Why Italy's Budget is Problematic
Italy's draft budget is expecting a deficit of 2.4 percent of the gross domestic product for 2019, which is below the 3-percent threshold advised by the European Union, but is a departure from the 0.8 percent agreed by the previous Italian government.
"There is a lack of revenue — the government has refused to increase VAT — and there is an increase in expenditure. The budget includes two flagship measures supported by the Five Star Movement (M5S), namely the creation of a universal revenue and the relaxation of the pension system," William De Vijlder, the group chief economist of BNP Paribas, one of the largest banks in Europe, told Sputnik.
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At the same time, Italy has pledged to reduce its deficit from 2020 onward, and its deficit projection is not even the highest in Europe, the economist said.
"As a reminder, for 2019, France forecasts a deficit of 2.8 percent, a priori higher than that of Italy. But the problem is the debt of Italy … At 132 percent of GDP, the Italian public debt is such that it drastically reduces fiscal room for maneuver. The annual interest charge is 65 billion euros [about $73.7 billion], the equivalent of the education budget. Relative to GDP, it weighs twice as much as in France," De Vijlder explained.
Debt Pressure
Rome could potentially buy back its debt, its economy is strong enough, but the draft budget seems focused on short-term consumption boost rather than long-term investment, de Montpellier says.
"The problem is that the measures announced by the government of Giuseppe Conte in Rome are not related to long-term investments; they want to give an immediate boost to consumption growth, they won’t increase VAT next year, will create a basic universal income and plan to 'backtrack' on pension reforms (people will again be allowed to leave earlier) and introduce a tax amnesty. They could very well boost consumption, but for a short period, a few quarters maximum," the economist said.
In addition, Italy's expectation of the GDP growth of 1.5 percent in 2019 seems overly optimistic to De Vijlder given its performance over the past few years.
Markets Cautious
De Vijlder has pointed out that the creditors have been concerned ever since the new government, composed of right-wing Lega and anti-establishment M5S came to power in Italy in June.
"For five months that the 'anti-system' populist coalition governs, the creditors of Italy are more demanding: the 'spread,' the difference between the cost of financing of the Italian and German states, increases (from 233 to 290 [basis points])," De Vijlder told Sputnik.
READ MORE: 'There Is Room for Italy to Change Budget Targets' — Scholar
The economist added that the statements of the Italian officials, in particular, Minister of the Interior and leader of Lega party, Matteo Salvini, have not been reassuring.
"The commission seems to sanction the form as much as the substance," De Vijlder said.
M5s Suspicious
Laura Agea, a member of the European Parliament and of M5S, stresses that the Italian government, while respectful of the EU fiscal rules, wants to focus on growth.
"Austerity is a serious threat to the European economy because it brings more poverty without cutting the debts. There is enough data supporting this, and Nobel Prize winners, such as Joseph Stiglitz, have confirmed it. The Italian public debt is not the result of nefarious primary deficits but is mainly due to the growing interest expense," Agea told Sputnik.
Agea emphasized that Italy's 2.4-percent deficit fell well under the 3-percent limit.
"The European Commission, by its own admission, applies the rules for some and interprets them for others. This is unacceptable," Agea said.
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Ignazio Corrao, also a member of the European Parliament and of M5S, remarked that Pierre Moscovici, the European Commissioner for Economic and Financial Affairs, had reportedly had dinner with French President Emmanuel Macron shortly before the commission decided to reject Italy's budget.
"The European Commission should be impartial but it applies the rules for a few and interprets them for the others. It closed an eye on the deficit of France and it persecutes Italy. Moscovici is not a referee but rather a player on the field."
Meanwhile, Gilles Lebreton, a member of the European Parliament and of France's National Rally, finds it "astonishing" that the commission would launch the procedure against Italy even as it failed "to adopt its own 2019 budget in time."
"To me too, Commissioner Pierre Moscovici is a player and not a referee as he should be. It's all about punishing Italy for daring to support Salvini and the ‘populist’ government," Lebreton told Sputnik.
The lawmaker said that the commission might be worried about the next year's European elections in light of the increasing appeal of populist parties.
Rinse, Repeat
If Italy persists, it will face the EDP procedure, whose cycles may take months or even years. In 2018, the European Commission recommended closing the EDP procedure against France that started in 2009.
At that time, if a country is a member of the eurozone, which Italy is, it will face sanctions. If a country has failed to take action, it may be fined 0.2 percent of its GDP or have EU assistance temporary suspended.
The member state is then given another three to six months to correct its behavior. If the action has been taken, but the set targets have not been met, Brussels may give new recommendations and another deadline to comply.
The views and opinions expressed by the speakers do not necessarily reflect those of Sputnik.
