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    Analysts Explain What is Behind Rome, Brussels Standoff Over 2019 Draft Budget

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    BRUSSELS (Sputnik) - Rome and Brussels are at loggerheads over Italy's refusal to change its 2019 draft budget, criticized by the EU authorities over its failure to comply with EU rules on debt reduction.

    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.

    READ MORE: Italy's Budget Deficit Issue 'Has Never Been as Serious as It is Now' — Prof

    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

    Charlotte de Montpellier, the economist at ING Bank in Brussels, argues that Italy's debt is currently under control, but "the risk is strong of seeing the debt start to grow on its own if the interest rates — which are at a historical low — start to rise again or if the European Central Bank changes its monetary policy for the eurozone."

    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.

    READ MORE: EU Sanctions Will Not Be Such Big Blow to Italy — Scholar on Budget Row

    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.

    Once the council decides that the corrective action is needed, a member state has between three and six months to comply with the requirements of Brussels. The commission then reviews the progress made, and if it believes that nothing has been done the council will set new targets.

    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.

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    European Economic Area, budget, GDP, draft, ING Bank, European Commission, The European Central Bank (ECB), BNP Paribas, Gilles Lebreton, Matteo Salvini, Italy, EU
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