Italy’s populists refuse to move after EU rejects budget

European Commission repeatedly warned country to cut deficits in its 2019 draft budget

In what is becoming a dangerous game of chicken for the global economy, Italy’s populist government refused to budge Tuesday after the European Union for the first time sent back a member state’s proposed budget because it violated the bloc’s fiscal laws and posed unacceptable risks.

The European Commission, the bloc’s administrative body, had repeatedly warned Italy to reduce the deficits in its 2019 draft budget to avoid heavy fines early next year. But Italy’s populist government, which has bristled against Europe’s austerity measures, went ahead and submitted a budget with a proposed deficit equal to 2.4 per cent of gross domestic product. That figure was considered much too high for a country whose total government debt equals 131 per cent of GDP, more than double the Eurozone limit.

As expected, the commission rejected the plan, saying that it included irresponsible deficit levels that would “suffocate” Italy, the third-largest economy in the Eurozone. Investors fear that the collapse of the Italian economy under its enormous debt could sink the entire Eurozone and hasten a global economic crisis unseen since 2008, or worse.

Populists not scared

But Italy’s populists are not scared. They have repeatedly compared their budget, fat with unemployment welfare, pension increases and other benefits, to the New Deal measures of Franklin D. Roosevelt that helped America emerge from the Great Depression.

“The only thing that we have to fear is fear itself,” Luigi Di Maio, Italy’s vice premier and the leader of the anti-establishment Five Star Movement, told reporters as it became clear that the European Commission would reject the plan.

After the official rejection, Di Maio wrote on Facebook, “We know that we are on the right path, and therefore we won’t stop.”

His coalition partner and fellow vice premier, Matteo Salvini, the leader of the farright League party, was equally scathing. “This doesn’t change anything. Let the speculators be reassured, we’re not going back,” he told reporters during a trip to Romania. “They’re not attacking a government but a people. These are things that will anger Italians even more.”

Italy has three weeks to revise its budget under the bloc’s rules, but the EU’s unprecedented response may just be the instigation to a fight that Di Maio and his coalition partners have been itching for.

Both the Five Star and the League ran for election this year in direct opposition to Brussels. With European Parliament elections on the horizon in May, it does not hurt their cause to reintroduce the spectre of a bureaucratic bogeyman preventing them from stimulating the Italian economy and delivering on their campaign promises.

All of which make for strong political arguments that resonate with angry Italian voters who have yet to recover from the last debt crisis. Still, the markets are less moved by the talking points.

Italy has three weeks to revise its budget... but the EU’s unprecedented response may just be the instigation to a fight that Di Maio and his partners have been itching for.