The coalition government in Italy has not blinked in its dispute with the European Commission over its budget proposals which are set to increase its public debt levels. Italy says that the spending plans are needed to kick-start the sluggish Italian economy and that, in the end, they will reduce public borrowing rather than increase it.
Under agreements made when entering the Euro, nations pledged to ensure that their deficits remained less than 3% of GDP and that their public debt would not exceed 60% of GDP. The Global financial crisis and the European sovereign debt crisis put both of these accords under strain, but most nations were able to get the deficit spending back on track reasonably quickly. The Italian budget is not set to breach deficit spending, coming in at 2.4%, however, it will add to the nation’s national debt which stands at 131%, well over twice its permitted level and second only to the Greek debt at 178% of national GDP.
The EC has started a process to sanction Italy. It will be a long process but could ultimately lead to Italy being fined 0.2% of its GDP – Italy’s gross domestic product is about €1.7 trillion meaning the fine would be about €3.4 billion.
The Commission took the unusual step of rejecting Italy’s budget when it was presented, giving them time to make changes which Italy has refused to do. The Commission’s report cited a “particularly serious non-compliance with the fiscal recommendations for2019”. Valdis Dombrovskis, EC Vice-President noted: "With what the Italian government has put on the table, we see a risk of the country sleepwalking into instability." He went on to say that the EU’s “excessive deficit procedure” would now be applied. The procedure is lengthy and the EU remains open to discussions with Italy as to how to resolve the matter.
The Italian government intends to boost public spending to fulfil a raft of election promises and in the hope of catalysing the economy. Amongst the promises were an “end to poverty”, cancelling a plan of the previous government to increase retirement ages and to guarantee a basic income of €780 to all Italian households; these measures are estimated to cost 0.7% of GDP.