EU rejects ‘big-spending’ budget

BRUSSELS: The European Union (EU) officially rejected Italy’s big-spending budget yesterday, clearing the path for unprecedented sanctions and deepening a bitter row with Rome’s populist government.

“With what the Italian government has put on the table, we see a risk of the country sleepwalking into instability,” Commission Vice President Valdis Dombrovskis told a press conference in Brussels.

“We conclude that the opening of a debt-based excessive deficit procedure is... warranted,” he added, referring to the EU’s official process to punish member states for over-spending.

The conclusion was not surprising, coming after the commission already rejected Italy’s 2019 budget last month in a first for the EU.

But Italy refused to back down after the Brussels veto, setting the stage for yesterday’s final opinion at the commission.

The Italian budget is at fault for scrapping EU-pushed cost-cutting measures agreed by the previous government and instead promises a spending spree, including a basic monthly income for the unemployed and a pension boost.

The commission yesterday deplored “a marked backtracking” on past reforms, “in particular on pension reforms”.

With its opinion, EU member states now have two weeks to decide whether to allow the commission to trigger the excessive deficit procedure, a months-long process that could lead to fines.

Once activated, the procedure allows Rome the opportunity to negotiate and correct its ways before Brussels can inflict a sanction that can come as high as 0.2% of Italy’s gross domestic product.

Expectations are low in Europe that Italy’s right wing populist coalition will concede on the matter, at least until European elections next May, where the government hopes to ride a wave of anti-EU sentiment.

The coalition government, made up of the far-right populist League and antiestablishment Five Star Movement (M5S), insists the budget will help kickstart growth in the eurozone’s third-largest economy and reduce debt.

In Rome, Deputy Prime Minister Matteo Salvini indicated that he would not back down on plans to roll-back on the unpopular pension reform, which would allow thousands to retire in the coming months.

“Has the EU letter arrived? I am also waiting for Santa Claus,” said the far-right Deputy Prime Minister Matteo Salvini, adding: “We will respond to the EU in an educated way.”

All eyes now are on the markets that could inflict the pressure on Rome to budge to Brussels, and even split the ruling coalition in Italy.

The “spread” — the difference between yields on 10-year Italian government debt compared with those in benchmark Germany — reached 316 basis points yesterday, down from 326 late on Tuesday.

It has more than doubled since May when negotiations to form the coalition government in Rome began, but is lower than the roughly 400 mark that Italy argues is the danger zone.

In its budget, Italy intends to run a public deficit of 2.4% of gross domestic product in 2019 — three times the target of the government’s centre-left predecessor — and one of 2.1% in 2020.

Brussels forecasts Italy’s deficit will reach 2.9% of GDP in 2019 and hit 3.1% in 2020 — breaching the EU’s 3.0% limit.