Kristian Rouz – Italy's Deputy Prime Minister Luigi Di Maio says the EU has agreed to allow Italy to run a budget deficit above the bloc's recommended threshold if it helps the South European nation grow its economy to ultimately reduce its debt-to-GDP ratio.
The announcement comes after another Deputy Prime Minister, Matteo Salvini, warned he could quit the Italian cabinet – which would complicate future talks between Brussels and Rome.
According to Italian newspaper Il Corriere della Sera, Di Maio – who is the leader of Italy's 5 Star Movement – said the EU will make concessions in the ongoing standoff over the nation's budget for the next year.
The deputy PM says Italy is determined to run higher deficits in order to rebuild its economy and end the vicious cycle of weak GDP growth, high unemployment, and a gradual, although slow, accumulation of debt.
Di Maio believes by tapping deeper into deficit once, Italy will be able to get its economy back on track and start reducing the 130-percent-of-GDP debt burden over the next few years.
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"It takes courage to get the country going again", Di Maio said. "If it comes to cutting taxes and creating tens of thousands of jobs, we need to move forward".
The EU, for its part, says it will delay the launch of a disciplinary process against Italy over the latter's refusal to comply with the bloc's fiscal rules. EU officials said Rome needs more time to coordinate its longer-term budget strategy with Brussels, and fiscal sanctions against Italy would be counter-productive at this stage.
Italy's ruling coalition of Di Maio's 5 Star Movement and Salvini's Lega is committed to advancing talks with Brussels, officials say, but next year's budget must include a broader fiscal stimulus package.
Unless the EU agrees to these conditions, Salvini said recently, he would exit the government – threatening a possible political crisis in his country, which would likely derail the entire dialogue with Brussels, and would hardly help the EU enforce its budget rules anyway.
The EU had insisted that Italy increase taxes and cut spending to improve its public finances, but Salvini said such moves would undermine Italy's GDP growth for years to come.
"The next (year's) budget must not increase VAT (value-added tax)”, Salvini said. “Who pays the minimum wage? Businesses. And if I do not reduce taxes to those who pay it, I cannot guarantee the minimum wage to anyone”.
Italy's finance ministry is set to send a new letter to Brussels this week, explaining its stance on fiscal policy for the next year. Rome will also provide Brussels with a spending review.
Reports claim if EU officials see substantial evidence Italy is able to actually spur economic growth within a “reasonable” increase in its deficit gap, it will likely give the Salvini-Di Maio team the go-ahead to avoid a deeper crisis.
Italy's debt burden is expected to rise to 135 percent of GDP in 2020, compared to 132.2 percent last year, overshooting the EU's 3-percent per-year ceiling. However, the Italian economy could gain momentum due to a combination of the fiscal stimulus and monetary accommodation from the European Central Bank (ECB).
Italy's GDP contracted by 0.1 percent in 2Q19 year-on-year – meaning even if Italy kept this year's budget for the next year, its debt burden would still grow in proportion to the size of its economy. Salvini and Di Maio believe the only way the problem could be solved is to accelerate Italy's GDP growth, while austerity is unlikely to help.
"It is an operation in which we all win: higher salaries, more jobs, and less taxes for businesses”, Di Maio said.