The Strategist

Italy refuses to amend the draft budget. What will happen next?

11/15/2018 - 14:26

Italy will leave unchanged the main parameters of the draft budget for 2019, namely the target deficit of 2.4%. On Wednesday night, Rome thus responded to the ultimatum of the European Union, which required bringing the draft budget in line with the norms of the euro zone. There are no precedents like the current confrontation between Rome and Brussels in the history of the EU.

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In the last minutes of Tuesday, when the EU ultimatum was about to expire, the Italian government sent the answer to the official request of the European Commission to amend the draft budget for next year. Information that the main parameters of the document - the target budget deficit of 2.4% of GDP and the planned growth rate of GDP (1.5%) - will remain unchanged, appeared on the website of the Ministry of Economy and Finance of Italy on Tuesday morning. In the evening, after the meeting of the Council of Ministers, Deputy Prime Ministers Luigi Di Maio and Matteo Salvini reiterated once again that “they are not going to make concessions to Europe.”

The confrontation between Rome and Brussels has been going on from October 15, when Economy Minister Giovanni Tria sent the draft budget for 2019 to the European Commission. It lays additional charges of € 37 billion, of which € 22 billion will not be offset by cost reductions. The ratio of the budget deficit was at 2.4% of GDP, and not 1.8%, as the EU expected. The European Commission rejected this project, and since the oral persuasion did not work, an official letter was sent to Italy demanding changes to the budget so that it complies with its obligations to the EU.

The financial document presented by Italy is in sharp disagreement with the Stability Pact, undertaken by the former Italian government with the obligation to gradually reduce the national debt of € 2.3 trillion.
The need for this commitment is explained by the fact that Italian debt is the largest of the EU countries, not counting Greece.

However, the “government of change,” as the coalition of the League and the Five Stars calls itself, has other tasks. They have budgeted all their costly election promises, for example, the “basic income”, the single tax, which is fundamental for the League, promoted by both parties to partially cancel pension reform, protect defrauded depositors, tax and building amnesty, as well as other costly promises that are called populist.

The European Union considers Rome’s promises unrealistic. According to its forecasts, the growth of the Italian economy next year will be at the level of 1.2%, and in 2020 it will be only 1%. The IMF gives a similar forecast. But for the next year, European structures predict the ratio of budget debt to GDP of Italy at the level of 1.9%, and in 2020 - 3.1%, which already exceeds the parameters required for the euro area. According to the European Commission, this will further complicate Italy’s service of its debt. But the main thing for which the EU criticizes the Italian financial document is the lack of economic growth stimulus.

The project received sharp criticism from the Parliamentary Commission on Budget, the Accounts Chamber, the Pension Fund, the Bank of Italy, the Confederation of Industrialists and Entrepreneurs, not to mention the opposition.

The other day, even the Vatican Episcopal Conference expressed fear for the fate of the Italian economy, wondering who will save Italy if the calculations of the authors of the draft budget are not justified. It seems that the Minister of Economy Giovanni Tria, who initially proposed to set the budget deficit parameter at 2%, is not too sure of these figures, and earlier, as media wrote, tried to persuade Luigi Di Maio and Matteo Salvini to bring the growth rate in the draft budget to those predicted the EU and the IMF.

This did not happen, and the only concession of the government was introduction of possible revenues from the privatization of state real estate to the project.

And therefore, as the newspaper Corriere della Sera writes, the next date of the confrontation between Rome and Brussels will be November 21, when the European Commission will give a final opinion on the submitted budgets of the euro zone countries. After that, as the newspaper writes, as early as December — January, the procedure for the deployment of the sanctions regime can be initiated in relation to Italy. It can get a real outline in February — March in the form of “coercion to reduce public debt and, possibly, other sanctions”. Austria, for example, has already stated that it is ready to vote for this plan.

However, many see this scenario as unlikely. Italy is too important for Europe to allow the onset of a serious crisis, which will inevitably be followed by a crisis throughout the euro zone, said Paolo Savona in October during a meeting with journalists.