What would happen when Italy’s Budget Clash with Brussels

Italy’s deficit has been below the EU’s three percent of GDP ceiling since 2015. In 2018, it should be 1.7 percent, according to the European Commission’s spring forecasts. But on October 3rd the Italian government irked Brussels and provoked the markets by tabling a draft budget forecasting a public deficit of 2.4 percent of GDP in 2019.

The commission expressed anger at this “significant deviation” from a promise made by the previous government for a 0.8 percent deficit in 2019. “Italy is not keeping its word”, Jean-Claude Juncker, head of the European Commission, said in an interview with Le Monde.

The key piece of data for Brussels is the so-called structural effort, a technical term for long-term reforms such as pension cuts and labour laws on hiring and firing. Further angering Brussels, Rome has decided to reverse course on these tough reforms, vowing to increase spending instead.

What’s the timeline?

2018-10-15 | Deadline for EU to receive draft of Italian Budget.

2018-11-30 | Final Deadline for revised draft Budget, where in between, 1 week for Brussels & Rome to negotiate to strike a deal and 2 weeks from submission to adopt an opinion.  If EU opinion is negative, it may request Italy to submit the revised draft budget within 3 weeks of the date of its opinion, where 2018-11-30 the final deadline.

2018-12-03 | Verdict from 19 Eurozone Finance Ministers will be passed.

If Rome remains defiant, then Brussels, backed by the ministers, can open an “excessive deficit procedure” which could theoretically lead the way to financial sanctions.

Will Brussels give Italy a pass?

For EU Finance Commissioner Pierre Moscovici, “the rules are not stupid” and should “be flexible and adapt to situations”.

Accordingly, bad students have so far escaped financial sanctions, which can go up to 0.2 percent of a nation’s annual economic output.

France is the most controversial escapee, after slipping by for nine years with a public deficit above the 3 percent of GDP limit. Brussels repeatedly issued angry warnings, but Paris was never punished, drawing bitter criticism from balanced budget sticklers, such as Germany and the Netherlands.

Similarly, Spain and Portugal avoided fines in 2016 despite public deficits well beyond the limits.

In the end, even if Brussels shirks from playing the enforcer, the markets could.

Traders, as well as the Italian government, are braced for the opinions of credit ratings agencies within the coming weeks. Downgrades could accelerate a flight of investors away from Italian debt, thus sending the government’s borrowing rates soaring and threatening the country with a default.

Reference

Thelocal.it, 2018-10-12, “Italy’s Budget Clash with Brussels: What you need to know”

The 19 eurozone finance ministers then meet on December 3rd and will give their verdict, based on the commission recommendation.

In case of “serious non-compliance”, Brussels has one week to consult with Rome and try to win changes or clarifications and two weeks from submission to adopt an opinion. If its opinion is negative, the European executive may request Italy submit a revised draft budget within three weeks of the date of its opinion, with November 30th the final deadline.

The European Commission deadline to receive the draft Italian budget – as well as those of the 18 other eurozone countries – is Monday, October 15th.