EU spells out Italy budget plan concerns | News | DW | 20.10.2018
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EU spells out Italy budget plan concerns

The EU's budget chief has called for a row over Italy's draft budget to be resolved calmly. Rome's plans to flout eurozone budget discipline rules pushed Moody's to downgrade the country's credit rating.

Italy's Deputy Prime Minister Luigi Di Maio said on Saturday the government would not be backtracking on its plans. 

"I think I can speak for the whole government, I deny any rethinking of the 2.4 percent [goal]," Di Maio, who heads the Five Star Movement, told journalists in Rome. He also said there is no desire on [Italy's] part to leave the eurozone or the European Union.

His co-Deputy Premier, Matteo Salvini of the League party, echoed his cabinet colleague after a Saturday meeting: "There is, and there won't be any intention to leave the European Union or the single currency system." 

However, both Salvini and Di Maio said they wanted to change how the EU works.

The Commission's letter

European Economics Commissioner Pierre Moscovici said on Friday that the European Commission was waiting to see how Rome reacted to a letter he delivered listing concerns about Italy's planned 2019 deficit-raising budget before any decision was taken on whether to take action.

Despite Moscovici playing down fears that the spending proposals could threaten the financial health of both Italy and the eurozone, ratings agency Moody's on Friday downgraded Italy's sovereign bonds to Baa3 from Baa2 — one notch above junk status.

What Moscovici said

Speaking after two days of talks in Rome, the EU budget chief said

  • He wanted to "reduce tensions and maintain a constructive dialogue" with Italian authorities.
  • He did not fear Italian market jitters would be "contagious" for partner countries.
  • The Commission's main concerns had to do with the "higher deficit, Italy's debt load and the possibility for growth."

Unease in the bloc

Although Moscovici sounded reassuring toward Rome, Austrian Chancellor Sebastian Kurz, whose country holds the rotating EU presidency, was far less conciliatory in remarks made on Friday.

"The European Union is an economic and values-based community and works because there are common rules that everybody has to keep to," he said in Brussels.

"If you break these rules and Italy deviates from eurozone rules, then it means Italy is endangering itself but, beyond that of course, is also endangering others," he added, saying that the EU was "not prepared to take over this risk" for Italy.

Italian Prime Minister Giuseppe Conte told reporters in Brussels that no changes were needed to the budget, saying it was only necessary for it to be explained to the Commission. He insisted that EU calculations of the increase in the structural deficit were too high.

Read moreItalian bonds hit over possible EU revision of 2019 budget plan 

 Giuseppe Conte (picture-alliance/Xinhua/Y. Pingfan)

Conte: The budget only needs explaining

Why is the European Commission worried? Rome's ruling populist parties, the 5-Star Movement and the League, plan to raise public borrowing to the finance tax, welfare and pension giveaways they pledged in their election campaigns. The plans have caused concerns in Brussels largely because Italy already has one of the highest levels of debt in the world, equal to more than 130 percent of gross domestic product (GDP). 

Read moreItaly's Matteo Salvini: EU has 'ruined our country' 

How does it justify its concerns? Although the projected deficit of 2.4 percent for 2019 is below the EU's 3 percent limit, it is up sharply from a targeted 1.8 percent this year. The letter from the European Commission said the difference between the expected budget deficit and the one now foreseen for 2019 was "unprecedented in the history" of EU budget rules and could mean that Italy would be unable to lower its public debt as promised.

What can the Commission do?  Since 2013, the EU body has had the power to dismiss a budget proposal and ask member states to draw up a new one, a power has not yet been used. If it does reject the planned budget, this will likely lead to a major row between Italy and the EU with unforeseeable consequences, as the government in Rome has pledged not to abandon its proposals.

What happens next? The Commission, the EU's executive body, has given Italy until Monday to respond. If not satisfied with the response, it can ask Italy to come up with a new budget proposal in three weeks. If Rome refuses, it could theoretically lead to financial sanctions.

Watch video 02:03
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02:03 mins.

EU and Italy line up for budget standoff

mm, tj/rt (Reuters, dpa, AP)

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