Italy’s Government Pulls Together to Face Down EU Budget Threats

(Bloomberg) -- The three top players in Italy’s bickering populist coalition came together on Wednesday to defy European Union budget rules as the bloc’s executive arm started disciplinary proceedings against Rome.

Prime Minister Giuseppe Conte and his deputies Matteo Salvini and Luigi Di Maio pushed back after the European Commission reprimanded Italy over the size of its public debt and took the first step toward imposing financial penalties.

The warning shot from Brussels prompted Conte to endorse calls from Salvini of the rightist League and Di Maio of the anti-establishment Five Star Movement for changes to the EU’s fiscal rules. As recently as Monday, Conte had threatened to resign if Salvini and Di Maio didn’t halt their squabbling.

“Today we have European rules drawn up in economic, social and political contexts that are different from today’s,” Conte said on Facebook. “This government of change will work to change them.”

On Monday, Conte had struck a more conciliatory tone, noting that EU budget rules “remain in force until we manage to change them.”

Dominant Force

Salvini, the dominant force in the coalition since his victory in European parliament elections last month, insisted in a statement that Rome must adopt policies -- including his signature “flat-tax” program -- that aren’t constrained by the austerity of the previous government.

“With cuts, sanctions and austerity, the levels of debt, poverty, insecurity and unemployment have increased,” Salvini said. “We must do the opposite.” Italy wants to invest in work and growth, Salvini said, adding he expects that “in Brussels, they will respect this.”

Di Maio also called for higher spending and tax cuts to stimulate the economy, saying on Facebook it’s “inconceivable” that a country with high unemployment that wants to invest in growth is penalized.

The commission said Wednesday that Italy hasn’t made sufficient progress in reducing its debt in line with the bloc’s fiscal rules, and that a disciplinary process is “warranted.” The step marks an escalation of the budget tussle between Rome and Brussels that roiled markets at the end of 2018.

Conte also took issue with the commission’s analysis, arguing that the 2019 budget deficit will be “significantly lower than that forecast by the commission.” He said improved tax revenue means Italy is on track for a shortfall of 2.2% of GDP this year and with additional efforts he aims to reach 2.1%. The commission has forecast a deficit of 2.5% this year and 3.5% in 2020.

While any penalties would be relatively small, an official reprimand from the bloc could still spell trouble for Italy, which is already roiled by financial markets and plagued by internal tensions. The stigma of a disciplinary process could cast a shadow over Italy’s ability to take part in EU business and may reduce the government’s leverage in negotiations like the scramble for European Central Bank board seats.

--With assistance from Lorenzo Totaro and Giovanni Salzano.

To contact the reporter on this story: John Follain in Rome at jfollain2@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Jerrold Colten

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