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Italy Can Expect the Full Brexit Treatment

Testing times for Italian prime minister Giuseppe Conte as he faces the European Commission.

Italy Can Expect the Full Brexit Treatment
Giuseppe Conte, Italy’s premier-designate, speaks during a press conference after meeting President Sergio Mattarella at the Quirinale Palace in Rome, Italy. (Photographer: Giulio Napolitano/Bloomberg)

(Bloomberg Opinion) -- Italy’s new prime minister Giuseppe Conte is eager to talk to the European Commission about running a higher deficit, he told his country’s parliament this week. He’s about to find out that the rest of the EU isn’t ready to listen.

Brussels is ready to take the same hard-line approach with Rome’s populist rulers as it has with Britain’s Brexit negotiators: Claims that the country deserves some kind of special advantageous status will be given short shrift. Italy’s anti-establishment parties will soon face the unhappy choice of going head-to-head with most other European member states, or else ditching most of the expensive promises they made to voters.

The League and Five Star coalition has put together an extraordinary wish list that’s been independently costed at up to 125 billion euros ($147 billion). This would amount to a major breach of EU fiscal rules, which require Italy to cut spending or raise taxes by approximately 14 billion euros over this year and next. Just like the Brexiteers, Rome’s new administration is yet to spell out convincingly why the EU should ignore its commonly agreed rules for one country’s benefit.

Italian politicians do offer some vague reasons why they might get a more sympathetic hearing. These range from the conviction that the EU will finally recognize Italy’s weight within the bloc to the hope that other members such as France know a new approach is needed on fiscal policy. There’s also the more aggressive mindset that believes the rest of the euro zone will cave in to Rome because an Italian debt crisis would be impossible to manage.

In recent days, the Commission has kept pretty quiet over how it might react. A number of clumsy early interventions, including one from the German budget commissioner Gunther Oettinger, prompted an angry rebuttal from League leader Matteo Salvini. Since then, European officials have preferred to say they respect the Italian people’s democratic choice – while waiting for concrete action from the new government.

Italy’s populists would be unwise if they mistook this silence for acquiescence. The first big test for Conte’s government will come in the autumn, when Italy has to present its draft budget plan to the Commission. Brussels expects the country to cut its structural budget deficit by 0.3 percentage points this year and by a further 0.6 percentage points next year. If it fails do so, Italy risks falling into a so-called “excessive deficit procedure,” leading to a rebuke and possible fine.

Some commentators have argued that Brussels could meet Rome half-way. For example, the Commission could let Italy run a budget deficit of, say, 5 percent next year. That will never be agreed. Even the most lenient euro zone finance minister would take fright at a more than doubling of Italy’s deficit, which stood at 2.3 percent last year (including one-offs.)

The European economy is expanding, meaning that heavily indebted countries should in theory be cutting the deficit, not adding to it. Moreover, Italy has been one of the biggest beneficiaries of new European fiscal rules that grant flexibility over the public accounts in exchange for structural reform. “Italy has already received some very big carrots,” says one senior European official.

The hope in Brussels is that Giovanni Tria, Italy’s new technocratic finance minister, will rein in his political masters in the League and Five Star. He makes his debut at the next meeting of euro zone finance ministers in two weeks, where his counterparts will seek reassurance about his tax and spending plans.

Next up will be Conte at the European Council meeting at the end of June, which should offer signs of whether he’s more than just a puppet of Five Star and the League. Some fear that Italy may decide to spoil the party just as the euro zone is set to decide on steps to bolster the monetary union. These measures don’t go far enough, but they’ve taken a long time to negotiate.

On the most optimistic view, Italy could (if it chose to) assume a role in supporting the French push for deeper euro zone ties, ranging from a European Treasury to a joint insurance on bank deposits. That would make the bloc more resilient to shocks. More pessimistically, should Rome insist on running vast fiscal deficits, its reputation in Europe will be ruined and its calls for more risk-sharing in vain. If Conte wants to succeed in his Brussels negotiations, he should start by showing restraint.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

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