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Italy's budget clash with Brussels: What you need to know

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Italy's budget clash with Brussels: What you need to know
How tough will the EU get with Italy over its budget? Photo: Gerard Cerles/AFP
17:39 CEST+02:00
Italy's populist government is about to submit its 2019 draft budget to the European Commission, a high-risk exercise that could lead to a feud between Rome and Brussels.

The brash attitude of Italy's anti-establishment government towards public spending has spooked the markets, with many fearing a re-run of the debt crisis that nearly saw Greece thrust out of the euro.

What is Brussels' problem with Italy's proposed budge?

In the heat of the crisis, the European Commission, the EU's executive arm, was handed new powers to enforce budgetary discipline in the eurozone through fines and a right of veto. These weapons have never been used, but some northern eurozone members such as the Netherlands and Finland want Brussels to get tough.

But with European elections fast approaching and support for populist and eurosceptic parties on the rise, the Commission is also under political pressure to again show flexibility.

At the heart of the concerns is Italy's staggering public debt, which amounts to a jaw-dropping €2.3 trillion. This represents some 131 percent of Gross Domestic Product (GDP), the biggest rate in the eurozone after Greece. That ratio is more than double the 60 percent of GDP limit set by European rules and above the eurozone average, which stands at around 86.5 percent of GDP.

Brussels has demanded Italy cut spending and reduce its public deficit in order to pare down the debt pile.

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Italy's deficit has been below the EU's three percent of GDP ceiling since 2015. In 2018, it should be 1.7 percent, according to the European Commission's spring forecasts. But on October 3rd the Italian government irked Brussels and provoked the markets by tabling a draft budget forecasting a public deficit of 2.4 percent of GDP in 2019. 

The commission expressed anger at this "significant deviation" from a promise made by the previous government for a 0.8 percent deficit in 2019. "Italy is not keeping its word", Jean-Claude Juncker, head of the European Commission, said in an interview with Le Monde.

The key piece of data for Brussels is the so-called structural effort, a technical term for long-term reforms such as pension cuts and labour laws on hiring and firing. Further angering Brussels, Rome has decided to reverse course on these tough reforms, vowing to increase spending instead.

What's the timeline?

The European Commission deadline to receive the draft Italian budget – as well as those of the 18 other eurozone countries – is Monday, October 15th.

In case of "serious non-compliance", Brussels has one week to consult with Rome and try to win changes or clarifications and two weeks from submission to adopt an opinion. If its opinion is negative, the European executive may request Italy submit a revised draft budget within three weeks of the date of its opinion, with November 30th the final deadline. 

The 19 eurozone finance ministers then meet on December 3rd and will give their verdict, based on the commission recommendation.

If Rome remains defiant, then Brussels, backed by the ministers, can open an "excessive deficit procedure" which could theoretically lead the way to financial sanctions. 

Will Brussels give Italy a pass?

For EU Finance Commissioner Pierre Moscovici, "the rules are not stupid" and should "be flexible and adapt to situations". 

Accordingly, bad students have so far escaped financial sanctions, which can go up to 0.2 percent of a nation's annual economic output.

France is the most controversial escapee, after slipping by for nine years with a public deficit above the 3 percent of GDP limit. Brussels repeatedly issued angry warnings, but Paris was never punished, drawing bitter criticism from balanced budget sticklers, such as Germany and the Netherlands.

Similarly, Spain and Portugal avoided fines in 2016 despite public deficits well beyond the limits. 

In the end, even if Brussels shirks from playing the enforcer, the markets could.

Traders, as well as the Italian government, are braced for the opinions of credit ratings agencies within the coming weeks. Downgrades could accelerate a flight of investors away from Italian debt, thus sending the government's borrowing rates soaring and threatening the country with a default. 

READ ALSO: Italy must 'play by the rules' on budget: IMF chief


Photo: Kazuhiro Nogi/AFP

By AFP's Céline Le Prioux

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