The ultimate source of Italy’s problem is the country’s extravagant burden of public debt
comes out of the naughty corner, another risks being sent there. On June 5th the European Commission opined that Spain was no longer breaking European fiscal rules, and recommended bringing its decade-long “excessive-deficit” procedure to a close. But it began the process of opening a similar procedure against Italy. Eventually, if no compromise is reached, the Italians could face a multibillion-euro spanking.
The ultimate source of the problem is Italy’s extravagant burden of public debt. In 2018 it came to 132% of, second in Europe only to Greece. The European Union’s rules require that this ratio fall at a prescribed pace. Instead, for the first time in four years, Italy’s debt ratio rose last year.That alone would not have warranted action if Italy had convinced the commission there was a good reason for the infraction, or that it would prove temporary.
Such arguments would usually sway the commission. But it fears a much worse fiscal picture in 2020. It expects the deficit to break the 3% ceiling enshrined in the’s Stability and Growth Pact, meaning Italy will violate both the debt and deficit rules. Mr Tria says this will be avoided either by raising the value-added tax or through “alternative measures” that bring in equivalent revenue. Brussels is sceptical.
For now the government has time on its side. The commission’s patience may be wearing thin, but it is not exhausted. A formal disciplinary procedure is launched only once the finance ministries and heads of member states give their blessing. That will not happen beforeleaders meet at a European Council summit on June 20th. The leaders may be satisfied with minor concessions, similar to those Italy’s government made in 2018 when a row erupted over this year’s budget.
Even if no concessions are made, a fine is a long way off. Once a procedure has been formally opened, the commission will ask Italy to take remedial steps. Only if Italy is deemed to have failed to do its homework will it be fined. In principle, the penalty could be as high as 0.2% ofFinancial markets, typically a more effective source of discipline, were largely unfazed by the commission’s report on June 5th. But the coalition’s first year in power has hurt investors’ confidence.
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