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Italy's Budget Is Europe's Problem

Europe Needs a Smarter Kind of Fiscal Discipline

(Bloomberg Opinion) -- The European Union’s move to discipline Italy for excessive public borrowing poses an awkward question: What use are rules that lack credibility against a member that acts in bad faith?

The answer is not much.

The EU’s fourth largest economy hasn’t just fallen short of complying with the bloc’s budget rules — its populist government has openly and repeatedly flouted them. The EU tried leniency last year, and then it tried finger-wagging. Now the European Commission is finally throwing the book at Rome.

Its ruling this week could lead to an initial fine of up to 3.5 billion euros ($4 billion) and tighter oversight of Italy’s fiscal policy. If Italy continues to misbehave, it could be fined up to 0.5% of GDP, lose loans from the European Investment Bank and have its plans to issue new debt monitored.

No question, Italy needs to set a new fiscal course — not to please Brussels, but in its own interests. So far, Italy has had no trouble finding buyers for its debt, but its record of profligate spending, insufficient debt reduction and lack of economic reform could change that in short order.

Italy’s governing partners, the League and Five Star Movement, seem unconcerned. They’re still intent on shoring up support with populist spending promises. Prime Minister Giuseppe Conte, who mediates between the two partners, threatened Monday to resign if this doesn’t change.

The EU has a legitimate interest in preventing Italy from further self-harm, because the damage might not be confined to one country. But its current approach to fiscal control is playing into the populists’ hands. The League’s Matteo Salvini has made a political virtue out of breaking the rules.

Establishing a bloc-wide commitment to keeping debts and deficits in check makes sense in a monetary union, where a fiscal crisis is likely to lead to pressure for bail-outs. But the rules need to be well designed, consistently applied and presented to citizens in terms they can understand and support. In practice, the system has been both excessively rigid (especially in downturns) and erratically enforced. Voters might be forgiven for thinking that the system imposed upon them is unprincipled and opaque.

Certainly, Italy’s government needs to start behaving more responsibly. But the EU needs to be a more skillful and consistent disciplinarian. At the moment, there’s little sign of either.

Editorials are written by the Bloomberg Opinion editorial board.

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