Italy could clash with Brussels over regulation limiting debt in 2019

The European Union (EU) is upping the pressure on Italy to make next year’s budget deliver on promises to reduce the country’s debt, despite government proposals that could add billions to a balance sheet already in the red.

The government of Prime Minister Giuseppe Conte is required to submit its draft 2019 budget to the European Commission no later than October 15. Meanwhile, media have repeatedly reported concerns that proposed spending measures for infrastructure, pensions, and minimum income could push government spending in 2019 to more than 100 billion euros ($117 billion), or around 5 percent of the country’s gross domestic product (GDP).

With lower tax revenue stemming from slow economic growth and a proposed flat tax for corporations, the spending plan could push the deficit above the 3-percent of GDP cap for countries using the euro currency.

The European Commission has said it not only expects Italy to stay below the 3-percent limit, but to pass a budget that will help reduce the government debt, which totals around 132 percent of GDP, the secondhighest level in the eurozone after Greece.

“If things continue as they are, at least one side will have to compromise,” Javier Noriega, a macro-economist with Hildebrandt and Ferrar, told Xinhua. “But there are consequences if either side does it.”

Noriega said that if the Conte government backs down from some of its central pledges, it risks losing the support of either the anti-establishment Five-Star Movement or the antimigrant League, the two parties supporting Conte. If either pulled its support, the Conte government would collapse.

Meanwhile, if the EU lets Italy disregard fiscal rules, Noriega said, other European countries would cry foul and some might try to follow suit. Austrian Finance Minister Hartwig Loeger recently said the EU should be prepared to sanction Italy if it fails to reduce the government debt with the measures proposed in the 2019 budget.

“Up until now, the new Italian government has not shown a willingness to work with the European Union, or visa-versa,” Noriega said.

Because of EU rules, Italy’s parliament will be working to refine and pass the 2019 budget at the same time the European Commission is evaluating an earlier draft of the document. The Parliament is scheduled to begin debate on the budget on October 20, five days after Italy submits the budget to the European Commission. Parliament could make changes to the budget, but it must finalize and pass the measure by the end of the year. That is one month after the European Commission is set to rule on whether the budget plan is compliant with EU rules.

“Every year there is a rush to finalize and adopt the budget at the same time commissioners are evaluating it for compliance,” Marco Batti, a researcher with the Brussels watchdog group BTI, said in an interview. “But it is rare that the risks for a clash are as high as they are now.”

In what could be a move in an eventual compromise, both Labor Minister Luigi Di Maio and Interior Minister Matteo Salvini – the heads of the FiveStar Movement and the League, respectively – have promised to obey EU rules with their next budget. But both have said they expect the other party to give up some of its central promises in order to reach that goal.