So Close Yet So Far Apart: Inside the Italy-EU Budget Tussle
So Close Yet So Far Apart: Inside the Italy-EU Budget Tussle
(Bloomberg) -- Italy may be days from becoming the first country to be disciplined by the European Union for failing to rein in its debt.
The official infringement procedure could lead to fines of up to 9 billion euros ($10 billion) and leave the country subject to special EU scrutiny for years. It could also deepen the rift between Brussels and the euro area’s third-largest economy, where some senior officials have at times toyed with leaving the currency union.
While Italy has made progress toward meeting the EU Commission’s demands for this year, its projections for 2020 still look very difficult to reconcile, an official said Tuesday.
Read More: The EU Prepares to Discipline Italy -- Here Are the Next Steps
As Commission President Jean-Claude Juncker and his colleagues assess Italy’s fiscal position, their focus is on the country’s so-called structural budget deficit. That’s a measure of Italy’s budget shortfall calculated by the EU that strips out the effect of the economic cycle.
With public borrowing at 132% of GDP -- more than twice the EU limit -- Italy must make significant debt reductions each year. The target is to improve its structural deficit by 0.6% of GDP both this year and next.
The two sides have been edging closer on the 2019 numbers, but the picture for 2020 is grim.
The government needs to find 23 billion euros of new revenue or spending cuts to prevent an automatic increase in sales tax kicking in. The EU’s demands would add another 10 billion euros to the savings required.
Deputy Premier Matteo Salvini, however, has vowed not to raise VAT and, what’s more, he’s promised voters another 10 billion euros in tax cuts.
That pushes the gap between the EU and Rome to more than 40 billion euros.
On Tuesday, Salvini dismissed the possibility of further concessions. "We have given the EU all possible commitments," he said. "The numbers are clear and the numbers are telling us that the Italian economy is healthy and wants to grow. We are not in the Middle Ages anymore."
Balancing the Books
For 2019, the EU could grant Italy flexibility available for unexpected events like last summer’s bridge collapse in Genoa. That would bring the adjustment required down to 0.42% of GDP.
Italy meanwhile says that a series of one-time revenues plus lower-than-expected spending for the populists’ flagship programs are worth about 5.3 billion euros. That’s enough to improve the structural deficit by 0.1 percentage point, the Treasury says -- the commission is forecasting a deterioration of 0.2 points.
If Italy’s numbers are right, then the two sides are just 0.3% of GDP or about 5 billion euros apart. That in itself might be close enough for the commission to give Rome a pass again.
But that may be overshadowed by the prospect of another battle when discussions on the 2020 budget start in September.
--With assistance from Viktoria Dendrinou.
To contact the reporters on this story: Marco Bertacche in Milan at mbertacche@bloomberg.net;Lorenzo Totaro in Rome at ltotaro@bloomberg.net
To contact the editors responsible for this story: Christopher Kingdon at ckingdon@bloomberg.net, ;Ben Sills at bsills@bloomberg.net, Jerrold Colten, Alessandro Speciale
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