Italy escapes EU budget sanction procedure after spending cuts

The European Commission concluded on Wednesday (3 July) that Italy was no longer breaching the EU’s fiscal rules after the government reduced public spending by €7.6 billion in a last-minute effort to escape a sanction procedure.

But the EU executive said it will keep a close eye on Rome as officials still doubt Italy’s  commitment to reduce its public debt next year.

“Our dialogue has been fruitful, there are real measures on the table,” said Pierre Moscovici, the EU’s Commissioner for Economic Affairs, after discussing the issue with fellow commissioners on Wednesday (3 July).

Italy was facing a new excessive deficit procedure, due to its insufficient efforts to cut down public debt, which is expected to reach 135% of GDP next year. The Commission also predicted that the country’s deficit would surpass the 3% GDP threshold next year, by half a point.

A sanction procedure could have led to a fine amounting to around €3.4 billion (0.2% of Italy’s GDP).

But after some last-minute measures, the EU executive concluded that the process was “no longer warranted”.

The populist government in Rome reviewed its 2019 budget on 1 June, including a correction amounting to €7.6 billion, or 0.42% of Italy’s GDP in nominal terms. 

As a result, Italy’s deficit is expected to reach 2.04% of GDP in 2019, as previously agreed with Brussels. Before the mid-term budget review, the Commission alerted in spring that the deficit would have reached 2.5%.

Excluding the impact of the economic cycle and one-off measures, the structural deficit will improve by around 0.45% of Italy’s GDP (around €8.2 billion). As a result, the Italian deficit shifted from a deterioration of 0.2% to a structural improvement of 0.2%.

The structural effort is the most relevant indicator once countries exit the strict surveillance of the excessive deficit procedure.

Against this backdrop, the Commission was satisfied with the efforts made by Rome to compensate for the deviation registered in 2018 and 2019, especially taking into account Italy’s stagnant economy. 

But Moscovici warned that “clearly, this is not the end of the road”, as the country will have to include further adjustments in its draft budget for 2020.

Moscovici said that assessing the Italian budget in October will be “one of the last battles” of the Juncker Commission, before the executive concludes its mandate at the end of that month.

“Italy has the responsibility to deliver on the promises made today for next year,” Moscovici warned, adding that the pledges for 2020 could have been “more precise”.

The French commissioner refused to speculate about what could happen in the autumn. But he did warn that the Commission will have to reconsider its position if Italy fails to deliver.

It is the second time in half a year that the Commission leaves the third largest eurozone economy off the hook. Last December, the EU executive also stopped an excessive deficit procedure against Rome at the last minute.

The EU executive’s soft hand with the Italian government has raised questions from budget hawks, including the European Fiscal Board and EU member states such as The Netherlands. 

“I will have criticism whatever I do, I can never win,” Moscovici admitted. 

But he insisted that some member states supported the Commission’s stance on Italy, saying the matter will be discussed by EU finance ministers next week.

“As I go to the Eurogroup and Ecofin, I feel quite confident that I did the right thing,” he said.

 

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