Italy ordered to rip up budget over risk of new euro crisis

Cheryl Sanders
October 24, 2018

In a four-page letter to the European Commission yesterday, Italy's government admitted its budget was "not in line with the norms of the stability and growth pact" governing EU member state public finances.

While the paper says it is "unlikely the sanctions would ever come into force at the risk of fueling further populist revolt in the region", Sean O'Grady in The Independent says Italy's budget crisis nevertheless poses "a bigger threat to the EU than Brexit", simply because "Italy has the capacity to blow up the European single currency, the euro".

Italy has a current account surplus while much of the Italian debt is funded by the country, he said.

Rome will now have to send a new draft budget that would cut the structural deficit, which excludes one-offs and business cycle swings, by 0.6 percent of GDP, rather than increase it by 0.8 points as in the current plan, the Commission said. The cost of servicing Italian public debt is already equal to the country's entire spending on education - 65 billion euros a year.

Speaking at a press briefing in Luxembourg, Managing Director Klaus Regling also said Italy's debt problems were different from those of Greece, which had to be bailed out three times.

The Italian government, which includes the anti-EU League party, will have three weeks to respond to Tuesday's decision by the European Commission with revisions of its proposal or ignore the commission's warnings. Italy argues the big increase in spending is needed to jumpstart the economy but the European Union and many regional leaders say it could jeopardize Europe's financial stability if Italy is unable to get its debts under control. The extra money will be spent on restoring pensions to as many as 400,000 people whose retirement age had been pushed back and on a basic income for some job-seekers. "We know that we are the last bastion of Italians" social rights. And for this we won't let you down. We know that if we give up, the pro-bank and pro-austerity "experts' will return", he wrote.

Commission Vice-President for the Euro Valdis Dombrovskis said Italy's response to the commission's concerns was "not sufficient" to assuage fears and the euro's rules were the same for everybody.

But both populist leaders also have something to gain with their voter base by leveraging a confrontation with the European Union, which has been seen as the bogeyman requiring austerity cuts in recent years.

Markets were quick to punish Italy over the dispute, with the government's cost of borrowing on global bond markets rising and the Milan stock market falling 1 percent. "I'm not surprised. This is the first Italian budget that was written in Rome and not in Brussels", he said on Facebook.

Eni, which is 30-percent government-owned, said in a statement that the action was taken despite "favorable prospects for the company and the expectation of strong credit metrics".

Other reports by iNewsToday