Possible Punitive Measures To be Taken Against Italy in Two Years - Scholar

© AP Photo / Luca BrunoTourists stroll in downtown Venice, Italy, Saturday, Nov. 12, 2016. Since 1951, Venice's population has steadily shrunk from 175,000 to some 55,000. Several factors are blamed, including high prices driven by a boom in tourism, the logistics of supplying a carless city, and the erosion of canal-side apartment buildings by lapping waters
Tourists stroll in downtown Venice, Italy, Saturday, Nov. 12, 2016. Since 1951, Venice's population has steadily shrunk from 175,000 to some 55,000. Several factors are blamed, including high prices driven by a boom in tourism, the logistics of supplying a carless city, and the erosion of canal-side apartment buildings by lapping waters - Sputnik International
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Deputy Prime Minister Matteo Salvini said that Italy would resist pressure from Brussels to revise its big-spending budget. This statement comes as the Eurogroup is poised to discuss punitive measures against Italy for exceeding budget deficit targets.

Radio Sputnik discussed the EU pressure on Italy with Lorenzo Codogno, visiting the professor in practice at the European Institute of the London School of Economics and Political Science, former chief economist and director general at the Treasury Department of the Italian Ministry of Economy and Finance.

Sputnik: What is your take on the pressure on Italy over the budget?

Prof. Lorenzo Codogno: The European Commission has effectively no choice but to follow the rules and to follow what the fiscal framework in Europe is suggesting. The budget that the Italian government presented is so far away from the direction that is set according to the rules that indeed it becomes almost a done deal that in general finance ministers in Europe will decide to put Italy into excessive deficit procedure.

Sputnik: What is the political situation right now in Italy? There is a populist government which obviously got elected on promises to increase spending and certainly not promises of austerity. How much pressure is there on the government right now to pursue that course despite any implications that it could have for Brussels-Rome relations or in the way of sanctions.

Prof. Lorenzo Codogno: I think at the moment they don't care much about the European fiscal framework. Indeed, they played that card in their advantage, in other words, they will probably run a political campaign ahead of European elections on an anti-European ticket, so to speak. So, I think this whole story against the fiscal rules and against Europe is actually playing in their favour in the sense that they are using this whole issue in order to take advantage politically and to try to gain in electoral terms.

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I think the government, according to what they have presented, they are not really aiming at reforming Italy or making any deep supply-side structural reform. The only aim here is to put the money in the pocket of voters. And clearly, this is the political objective they have in mind. So my guess is that now once European ministers decide on the excessive deficit procedure for Italy in January, then the whole story will stay on hold for a while.

First, because the Italian government will be focusing on the European elections, and then secondly, the Commission will try to keep a low-profile, and as you know after the European elections it will take several months for the new Commission to be fully operational. So, I think the whole issue will stay on hold for a long while from now on.

Sputnik: Do you think there is a lot of criticism within Italy of the budget or is it actually very popular right now?

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Prof. Lorenzo Codogno: The two forces that are supporting the government are still very popular and they gain support by promising a lot of money for everybody and especially the rolling back of the pension reform, so basically lowering retirement age and [setting] basic income. But this is not the way to do it, because sooner or later people will realise that these things are not feasible and Italy risks a lot by doing that.

So, my guess is that it will be increasingly difficult for this government to deliver on the promises. And it would be increasingly risky from the point of view of financial markets. So, my guess is that between now and May, probably, the government will survive, and then we will see, because it will depend on the election outcome.

Sputnik: Can you comment on the effects on investor sentiment from the stance of Brussels, where they are already talking about putting a lot of pressure on Italy to revise the budget and they are talking about possible sanctions. How does that affect the markets?

Prof. Lorenzo Codogno: I think the row between Rome and Brussels is, to some extent, fully discounted by now. I mean Brussels is just a way to kind of assess the fiscal situation and the position of Italy in terms of fiscal variables. But at the end of the day, I think what really counts is not what Brussels says, but what investors perceive. The investors clearly look at the assessment by Brussels as a reference point for where the situation is.

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So, I think, again, the decision by the Commission to recommend excessive deficit procedure is already on the table now. I think it is almost a done deal, the finance ministers will decide to go ahead. By now, the financial markets are fully pricing in this development. So, I don't think there will be any further market impact.

Sputnik: Bottom line: do you think a compromise is likely to be reached and to what extent is the threat of sanctions a deterrent to the current government?

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Prof. Lorenzo Codogno: I don't think a compromise will be reached; I think the ministers of finance in Europe will decide to put Italy into procedure. There will be a required adjustment path to follow. Italy will not follow that, at least until May. Then after May, we will see, because it depends on how it goes, it depends which government would be in place in the second half of the year, whether there would be early elections in Italy and so there are a lot of question marks.

Ideally, either this government or new government will start behaving in a more responsible way following the recommendation by Brussels. And then the situation will gradually improve. Sanctions won't happen before at least one year, because Italy will be given at least one year to probably adjust its accounts. So we are talking about again late 2019 or early 2020.

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And only at that time, probably will sanctions be considered. The sanctions have never been applied in Europe so far. I think it would be a very harsh decision to go along these lines; before that I think a lot of negotiations and discussions will take place.

The views expressed in this article are solely those of Lorenzo Codogno and do not necessarily reflect the official position of Sputnik.

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