Draghi’s Full-Throttle Italy Budget Shows No Return to EU Limits

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Italian Prime Minister Mario Draghi is following through on his view that the European Union’s fiscal rules are “obsolete” with a budget that projects deficits well above the bloc’s suspended ceiling for the foreseeable future.

The first annual public-finance plan of his technocratic government unveiled on Wednesday shows that even though officials reckon the shortfall could drop to 2.1% by 2024, they plan to keep exceeding the 3% level that used to trigger EU admonishments before the crisis. 

“Our budget is fundamentally expansive,” the prime minister told reporters in Rome. “Growth is the way out of the problem of high public debt.”

Draghi’s budget will feed into a dispute building among the bloc’s members that may intensify as the region’s rebound persists. Northern countries are seeking to revive rules intended to brake fiscal largess as part of membership of the euro, while others such as Italy look on such a regime as a straitjacket hindering expansion.  

The premier, whose tenure as European Central Bank chief until late 2019 was defined by repeated salvos of stimulus, has been outspoken on that. He recently described the EU’s so-called stability and growth pact as “obsolete,” and said there’s “no danger” of it returning in the same form. He revisited that theme on Wednesday.  

“The discussion on the stability pact will go on throughout 2022, but earlier I gave you some reasons why thinking in terms of the same rules as in the past seems to me unrealistic,” Draghi said. 

The EU suspended its fiscal limits in 2020 as the coronavirus pandemic forced countries to throw trillions of euros at emergency health spending and protection for jobs and businesses. With many countries still scarred by cuts after the 2008 financial crisis, austerity was no longer an option. 

In tandem with economies reopening after well-advanced vaccination programs, EU members this month began what is likely to be a bitter debate on the future of the pact as a group of eight nations led by Austria called for cuts in debt levels. 

Draghi’s stance is in line with that of France, which recently unveiled a budget focusing on economic growth with investments and a slower pace of debt reduction. French Finance Minister Bruno Le Maire said that his country wouldn’t “make the error of consolidating public finances too fast and killing off growth.”

Italian governments have spent over 170 billion euros ($198 billion) on stimulus since the outbreak of the pandemic, causing borrowings to balloon. 

The new budget targets debt at 153.5% of gross domestic product this year and a gradual reduction that should bring it near 145% in 2024. Only at the end of the decade will it return to pre-crisis levels.

The plans also forecast better-than-expected growth of 6% in this year and a fiscal shortfall of 9.4%, well below the 11.8% target set in April. 

“He is betting on an expansionary policy until 2024,” said Veronica De Romanis, a professor at Luiss university in Rome. “But he made it clear that he is not just betting on growth to reduce Italy’s debt, but also on the credibility of fiscal policies.”

Draghi’s push for growth is accompanied by an ambitious program that among other things include structural reforms of the fiscal system and public administration. 

Supporting that effort are low borrowing costs thanks the ECB’s bond-buying program, and nearly 200 billion euros in EU recovery fund cash headed to Italy in the next few years.

©2021 Bloomberg L.P.