The Strategist

Europe is not afraid of Brexit but Italy

11/29/2018 - 11:57

Negotiations on the UK exit from the European Union have reached the final lap, but the minds of European officials are now occupied not by Brexit, but by Italy. The aggravation of relations between the European Commission and the Italian government after populists came to power is the main concern of the European Union.

Niccolò Caranti
Niccolò Caranti
Now, according to most experts, the main concern of Brussels is not the United Kingdom, but Italy, which stood at the origins of the united Europe and has been one of the most “pro-European” countries for many years. However, the government that came six months ago to power first provoked a crisis in relations with the European Commission on the issue of migrants, and now is doing the same thing with the budget. The Italian authorities have made many promises during the election campaign and are trying to carry out at least some of them. However, the European Commission stood in the way of increasing the expenditure side of the Italian government budget. The Italian government refused to make concessions, and Brussels also intends to stand up to the end. This means that Italy is in danger of becoming the first European country that can actually be punished.

The Italian economy, the third euro zone economy, is traditionally developing very slowly. Rome’s budget deficit is not so great to cause such a harsh reaction of Brussels, but there is a very heavy load on the shoulders of Italy - a huge debt that does not allow this country to interrupt the long-term practice of treading on the spot.

Brussels was very unpleased with the new Italian budget. It was recognized as unrealistic and the key parameters had to be changed. Conte’s government, which is actually headed by the vice-premier and head of the Italian Interior Ministry, as well as the leader of the ultra-right Lega Nord party, Matteo Salvini, refuse to make major changes to the country's main financial document. The Italian authorities claim that trequirements of the European Commission to change the budget could destroy the country. Luigi Di Maio, Deputy Prime Minister of Italy and part-time leader of the Five Stars movement of the ruling coalition, called the EC demands an attempt to force the Italians to accept the budget.

“It’s very hard to believe,” Di Maio told reporters, “but they don’t understand the surrounding reality.”

Di Maio also said that the government is trying to avoid an excessive budget deficit for the next year, which may be provoked by its plans to boost spending. However, he also states that the government is not going to change the key parameters of the main financial document for 2019, that is, “sacrifice the Italians”.

Rome’s position is clear: at least in terms of the main parameters, the Italian government does not intend to change the new budget. Last time, the ruling coalition stated that this is impossible. The populists have confirmed that they intend to fulfill election promises, for which they need to increase the expenditure side of the budget and thus increase its deficit.

Italian Finance Minister Giovanni Tria at a business conference in Padua urged the EU to pay more attention to economic growth. According to him, the Italian economy will increasingly slow down its development. This forecast coincides with forecasts for the economies of Germany and France, which development is also rapidly slowing down.

“The problem of economic growth is pan-European,” said the main Italian financier. “It should be solved together, and not for each country individually, and even more so without any confrontation. It seems that Europe is not aware of the situation and seems to be unable to pursue a macroeconomic stabilization policy. ”

Recall that Rome protects its financial and economic goals for the next year: a budget deficit of 2.4% and an economic growth of 1.5%. Brussels regards both figures overly optimistic and difficult to fulfil. The budget assumes changes in pensions and taxes, which will cost 37 billion euro. Two thirds of them, 22 billion, will have to be borrowed, i.e. they will increase the budget deficit.

Italy’s budget deficit, on the one hand, is not so great and fits into a three-percent framework, but the huge national debt of Rome, the largest in Europe, makes the situation considerably more difficult.

As for the EU, the European Commission can take the next steps against Italy. On November 21, the executive branch of the European Union issued decisions on the 2019budgets of members of the euro zone and demanded Rome to accept the situation.

Publication of a negative decision in relation to Italy will automatically result in a launch of the punishment procedure, which includes both disciplinary (deprivation of the right to vote) and financial (a penalty of up to 0.2% of the country's GDP) measures. Rome will be offered to reduce the budget deficit to the level required by the European Union within 3-6 months, taking into account the Italian realities in the form of a huge debt.

May elections in Europe complicate the matter. The European Commission is unlikely to play up to populists and Euro-skeptics and will not make a decision before or immediately after the elections.


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