Don’t Let Italy Off the Hook
(The Bloomberg View) -- The European Commission has rejected Italy’s budget for flouting Europe’s fiscal rules, and has given Rome three weeks to try again. It’s the first time this has been done, and the move is risky because it sets up a political confrontation that could end badly. But the rules are there for a reason, and if the system is to work, Italy can’t be allowed to opt out.
The Italian government unveiled plans recently to lift its budget deficit to 2.4 percent of gross domestic product next year. Brussels wants the cyclically adjusted balance to improve by 0.6 percentage points of GDP; Rome chose to worsen it by 0.8 percentage points.
Countries have often deviated from their mutually agreed-upon targets, and the commission has typically been flexible after recessions or other disruptive events. But Italy’s case is different. Granted, its economy is growing only sluggishly, but its planned budget overshoot is “unprecedented,” as the commission said in a letter to the government last week, and its public debt, at more than 130 percent of GDP, is enormous.
Italy appears not to care. Finance Minister Giovanni Tria says that Rome will make boosting economic growth the priority. It not only rejected the EU’s fiscal rules as a practical matter, but also challenged them in principle. This left the commission little choice but to escalate the dispute.
Are the rules necessary in the first place? Yes, and the sovereign debt crisis shows why. Before, during and after the global financial crisis, Greece ran huge budget deficits, leading investors to lose confidence in Athens’ ability to cover its debts. Alarm spread to other fragile euro-zone economies, including Italy. Member states had to organize expensive rescues to turn things around. The lesson is clear: The euro area has a strong collective interest in each member’s willingness to maintain fiscal discipline.
Italy’s new plan fails to lower the structural deficit until 2022, and the delay has already spooked investors. Medium-term bond yields have climbed to the highest in nearly five years and Moody’s, the credit rating agency, has downgraded Italy’s bonds to a notch above junk. For now, the burden of interest payments is low by historical standards, but with a vast public debt and no serious effort to get public borrowing under control, the threat of another sovereign debt crisis is real.
Italy’s populist leaders appear to relish this confrontation with the commission, which they portray as a foreign entity meddling with a sovereign state. In an interview with Bloomberg News, Prime Minister Giuseppe Conte said Italy won’t give way. In that case, the commission should calmly apply the rules — commencing its so-called excessive-deficit procedure, which may lead to a fine of up to 0.5 percent of GDP.
To be sure, the controversy could embolden Italy’s ruling coalition before elections to the European Parliament. But if the euro zone is to succeed, fiscal cooperation and respect for budget rules can’t be seen as optional extras.
Editorials are written by the Bloomberg View editorial board.
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