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EU puts Italy on notice over spend-happy budget

The European Commission formally put Italy on notice Wednesday for its deteriorating deficit and huge debt, re-opening a battle with populist-led Rome.

EU puts Italy on notice over spend-happy budget
Has Italy made spending promises it can't keep? Photo: Vincenzo Pinto/AFP

The move by the EU's executive arm against Italy's bloated budget begins a complicated process that — if approved by eurozone ministers — could result in a fine of more than €3 billion.

“We have concluded that … a debt-based excessive deficit procedure is warranted for Italy,” EU commission vice president Valdis Dombrovskis told reporters, adding that bloc ministers must confirm the decision.

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Italy's nationalist Deputy Prime Minister Matteo Salvini on Saturday vowed not to yield to the EU, with fears that his fractured government could collapse under the pressure from Brussels.

The coalition of the hard-right League and anti-establishment Five Star Movement is deeply divided on how to handle the offensive by Brussels, with Prime Minister Giuseppe Conte threatening to resign if the squabbling did not stop.

Five Star deputy prime minister Luigi Di Maio reacted angrily to the EU's warning, saying: “We bear all the weight, and as if that weren't enough, they're lecturing us… We will go to Europe and discuss responsibly, so we can construct and not
destroy. But it's tough, when you see that every day they find another reason to say bad things about Italy and this government.”

Italy's public debt is a big problem and now sits at €2.3 trillion, or 132.2 percent of Italy's GDP — way above the 60 percent EU ceiling. The debt mountain leaves Italy very vulnerable to its cost of borrowing on financial markets that reward governments that adopt a more conciliatory attitude to Brussels.

Italian Finance Minister Giovanni Tria on Friday told Brussels that his government would do what it takes to rein in its soaring public debt, but without providing details.

Making matters worse, Italy on Friday revised its growth figures downwards for the first quarter of this year, putting spending commitments made to the EU even further out of reach.

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Italy's finance minister, Giovanni Tria, in Brussels. Photo: Emanuel Dunand/AFP

The feud with Rome comes just months after an earlier flare-up over Italy's draft budget for 2019.

Last year's technical recession had put intense pressure on the government in the eurozone's third largest economy, which won power in June on the back of big-spending electoral promises that ignored EU rules.

In a historic first, in October the Commission rejected Italy's budget, which promised a universal basic income and scrapped pension reform. The government was forced to water down its costly budget in December to avoid punishment and soaring borrowing prices on the markets.

READ ALSO: Foreign business owners in Italy have increased by a third since 2010

The EU's tough attitude comes under the insistence of Netherlands and Germany, which want eurozone partners to strictly abide by budget rules despite arguments that doing so stokes populism. 

The threat to put Italy into the sin bin comes on the same day that the commission officially proposed to remove Spain from the procedure, with Brussels satisfied that Madrid's public spending was back in order a decade after the financial crisis.

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ENERGY

What does the shut-off of Russian gas supplies mean for Italy?

After Russian energy giant Gazprom suspended gas deliveries to Italy on Saturday, many are wondering what consequences the stoppage will have on the country’s energy supplies.

What does the shut-off of Russian gas supplies mean for Italy?

What’s going on?

Over the past three days, Italy has received none of the gas supplies it expected from Russian energy giant Gazprom. 

The impasse officially started last Saturday, when Gazprom announced it would not be able to deliver gas to Italy due to “the impossibility of gas transport through Austria” – Russian gas supplies are delivered to Italy through the Trans Austria Gas pipeline (TAG), which reaches into Italian territory near Tarvisio, Friuli Venezia-Giulia. 

READ ALSO: Russia suspends gas to Italy after ‘problem’ in Austria

Though Gazprom originally attributed the problem to Austrian gas grid operators refusing to confirm “transport nominations”, Austria’s energy regulator E-Control said that the Russian energy mammoth had failed to comply with new contractual agreements whose introduction had been “known to all market actors for months”. 

Additional information about the incident only emerged on Monday, when Claudio Descalzi, the CEO of Italy’s national energy provider ENI, said that supplies had been suspended after Gazprom failed to pay a 20-million-euro guarantee to Austrian gas carrier Gas Connect. 

Descalzi also added that ENI was ready to step in and deposit the guarantee itself in order to unblock deliveries to Italy.

Logo of Italian energy regulator ENI.

Italian energy regulator ENI said it was ready to pay Austrian gas carriers a 20-million-euro guarantee to unblock deliveries. Photo by Marco BERTORELLO / AFP

READ ALSO: Italy’s ENI ready to pay guarantee to unblock Russian gas

At the time of writing, however, no agreement between ENI, Gas Connect and Gazprom has yet been reached, with the stoppage expected to continue until Wednesday at the very least.

What would an indefinite stoppage mean for Italy’s upcoming winter season?

Though energy giant ENI appears to be confident that a compromise between all the involved parties will be reached shortly, the “indefinite shutdown” of the Nord Stream 1 pipeline in early September is somewhat of a menacing precedent. 

After fears of a long-term supply suspension cropped up over the weekend, outgoing Ecological Transition Minister Roberto Cingolani publicly reassured Italians that “barring any catastrophic events, Italy will have the whole of winter covered”.

It isn’t yet clear what exactly Cingolani meant by “catastrophic”, but the latest available data seem to suggest that Italy wouldn’t have to resort to emergency measures, chiefly gas rationing, should Gazprom halt deliveries indefinitely. 

Italian Minister for Ecological Transition Roberto Cingolani.

Outgoing Minister for Ecological Transition Roberto Cingolani said that, “barring any catastrophic events”, Italy will have enough gas supplies for the winter. Photo by Andreas SOLARO / AFP

In 2021, prior to Russia’s invasion of Ukraine, Italy received around 20 billion cubic metres of Russian gas per year, which accounted for about 40 percent of the country’s annual gas imports. 

But, thanks to the supply diversification strategy carried out by outgoing PM Mario Draghi and his cabinet over the past few months, Russian gas currently accounts for, in the words of ENI’s CEO Claudio Descalzi, only “about nine to 10 percent” of Italian gas imports.

READ ALSO: Italy’s Draghi criticises Germany over latest energy plan

Granted, Italy still receives (or, given the current diplomatic deadlock, expects to receive) a non-negligible total of 20 million cubic metres of Russian gas per day. But, should supply lines between Rome and Moscow be shut off until further notice, Italy could fall back on existing gas stocks to meet winter consumption demands. 

Last Wednesday, Cingolani announced that the country had already filled up 90 percent of its national gas stocks – Italy has nine storage plants for an overall storage capacity of 17 billion cubic metres of gas – and the government was now working to bring that number up by an additional two or three percentage points.

These supplies, Cingolani said, are set to give Italy “greater flexibility” with respect to potential “spikes in winter consumption”.

Gas storage station in Loenhout, Belgium.

Italy has nine storage plants for an overall storage capacity of 17 billion cubic metres of gas. Photo by Kenzo TRIBOUILLARD / AFP

Finally, Italy is expected to receive an additional four billion cubic metres of gas from North Europe over the winter months – deliveries which will be complemented by the first shipments of LNG (Liquefied Natural Gas) from Egypt.

Both of these developments are expected to further reinforce Italy’s position in the energy market for the cold season.

What about the long-term consequences of an indefinite stoppage?

An indefinite shut-off of Russian gas supplies would effectively anticipate Italy’s independence from Moscow by nearly two years – Draghi’s plan has always been to wean the country off Russian gas by autumn 2024.

However, the Italian government’s strategy is (or, perhaps, was, as a new government is about to be formed) centred around a gradual phasing out of Russian supplies. As such, although not immediately problematic, a ‘cold-turkey’ scenario might create supply issues for Italy at some point during 2023.

READ ALSO: EXPLAINED: How much are energy prices rising in Italy this autumn?

Granted, Algeria, whose supplies currently make up 36 percent of Italy’s national demand, is expected to ramp up gas exports and provide Rome with nine billion cubic metres of gas in 2023.

But, even when combined with LNG supplies from several African partners – these should add up to a total of four billion cubic metres of gas in 2023 – there’s a risk that Algerian gas might not be able to replace Russian gas on its own.

An employee works at the Tunisian Sergaz company, that controls the Tunisian segment of the Trans-Mediterranean (Transmed) pipeline, through which natural gas flows from Algeria to Italy.

Algerian gas supplies, which reach Italy through the Trans-Med pipeline (pictured above), might not be enough to replace Russian gas in 2023. Photo by Fethi BELAID / AFP

Therefore, should an indefinite shut-off be the ultimate outcome of the current diplomatic incident between ENI, Austria’s Gas Connect and Russia’s Gazprom, Italy, this time in the person of new PM Giorgia Meloni, might have to close deals with other suppliers or ask existing suppliers to ramp up production. 

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