Brussels Worried by Italy’s Profligacy. Will the ‘Enfant Terrible’ Be Punished?

Back in the 1990s, Italy’s accession to the Economic and Monetary Union of the EU caused vivid debates and disputes. At the national level, representatives of Silvio Berlusconi’s center-right coalition repeatedly stated that the Maastricht criteria were “excessively heavy” and needed to be revised. In turn, some EU countries (France, Germany, the Netherlands, Spain) were suspicious about Italy’s accession to the eurozone. For Italy, joining the single currency club was in many ways a political decision – it was important to strengthen the country’s status. As a result, Italy was forced to make a serious correction of its financial and economic course (and later the political one, too), while focusing not on internal challenges and needs, but on the external ones.

Italy is the third largest eurozone economy. Like most EU countries, Italy today does not meet the Maastricht criteria. Public debt is about 130% of the GDP — only Greece has more. Rating agencies continue to downgrade Italy’s ratings, and investors look at the Italian markets with disbelief.

Against this background, the new Italian government, headed by Giuseppe Conte, intends to continue its rather distinctive course. In the next year’s draft budget a significant part of expenditures goes to social benefits, including the so-called “citizenship income”, the retirement age is lowered to 62 years with a minimum length of service of 38 years, the corporate income tax is reduced from 24 to 15%, and the flat tax scale is introduced. Thus, for the first time the Italian government decided to abandon the austerity policy, breaking the Brussels rules.

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Such draft budget was not adopted by the European Commission and was sent for revision, primarily due to the fact that the planned budget deficit of 2.4% of GDP was considered excessive. The Commission fears that the proposed social and fiscal policy will not lead to the desired economic growth, but, on the contrary, will only aggravate the situation in the country. For fairness’ sake it should be noted that the previous governments also had budgets with deficit (the government of Paolo Gentiloni – 2.4%, the government of Matteo Renzi – 3%).

The current Italian government sharply insists on 2.4% and does not intend to make concessions or reduce the social articles of the budget. The draft budget was signed by the nation’s president and will now be discussed in parliament, where it should be adopted before the end of December.

In this situation, President Sergio Mattarella is forced to play the role of a mediator between Italy and Brussels, calling for constructive dialogue between the Italian government and the EU.

The yellow-green coalition of Luigi Di Maio and Matteo Salvini continues to earn citizens’ support in the Rome-Brussels confrontation (the migration issue is also very acute). If the Italian version of the budget is adopted, Brussels will lose face, showing that it cannot keep the EU discipline. However, in this case the EU Commission has the right to impose sanctions against Italy. We can expect that this time Brussels will retaliate against its “enfant terrible”.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.