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Italy defies EU's request for smaller budget

November 14, 2018

Italy has stuck to its big-spending budget plan, despite demands for changes from the EU and the threat of financial penalties. The move has sparked concerns over Italy's debt, and uncertainty from investors.

Italian Deputy Prime Minister Luigi Di Maio speaks with reporters after a cabinet meeting in Rome
Image: picture-alliance/dpa/A. Medichini

The Italian government vowed to stand firm on its 2019 draft budget on Tuesday, ignoring a deadline set by the European Commission to revise its plans.

Although Italy did make minor adjustments, the revisions are not likely to persuade the Commission, putting Italy in a high-stakes standoff with Brussels that could result in financial sanctions.

Arm wrestling between Italy and the EU

  • Shortly before the midnight deadline, Italy's Deputy Prime Minister Luigi Di Maio announced that the government would not change its ambitious social spending plan, arguing that the increased spending is necessary to promote growth after years of austerity.
  • Italy's draft budget will raise the budget deficit to 2.4 percent of gross domestic product (GDP) — a stark increase compared to the previous government's target of 0.8 percent
  • The European Commission's forecast, on the other hand, expected a higher budget deficit which would breach the EU's 3.0 percent limit by 2020.
  • Italy now runs the risk of being fined up to 0.2 percent of GDP — which would amount to about €3.5 billion ($3.9 billion).
  • The Italian government did make some adjustments, saying that it plans to sell some government real estate to raise cash. Di Maio did not detail what would be sold, but said the properties won't include "the family jewels."

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'The budget will not change'

Deputy Prime Minister Di Maio, who leads the populist 5-Star Movement, announced the move in Rome on Tuesday evening following a ministerial meeting.

"The budget will not change, neither in its balance sheet nor in its growth forecast. We have the conviction that this is the budget needed for the country to get going again," Di Maio said on Tuesday evening after a ministerial meeting.

Speaking at the European Parliament on Tuesday, German Chancellor Angela Merkel said the EU wanted to reach out to Italy, but that the eurozone will only work "if every individual member fulfills their responsibility for sustainable finances."

Why is a higher deficit in Italy a problem? A rising budget deficit inflates a country's public debt. As it stands, Italy has one of the highest debt-to-GDP ratios in the EU — 130 percent of GDP, second only to Greece. Within the Eurozone, the recommended debt-to-GDP ratio is 60 percent. Rising levels of public debt would threaten Italy's credibility in global markets and, according to economists, be a hindrance to growth.

Why does Italy's government want to increase spending? The country's coalition government, formed through an alliance between the populist 5-Star Movement and the far-right League, believes increased spending is the only way to jump-start the country's economic growth. The government's plan to increase spending is aimed at implementing a series of electoral promises, including lower taxes, a lowering of the retirement age, and a universal income.

What happens next: If EU officials reject the budget again, the Commission can trigger legal action under an excessive deficit procedure. EU member states would then have to approve the Commission's proposal and Italy would be given another deadline to make the necessary amendments. If Italy still refuses to comply, the Commission can then apply fines up to 0.2 percent of GDP or cut EU regional subsidies.

rs, gs/ (AFP, dpa, Reuters)

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