Rome and Brussels oppose one another's economic policies

Published 10.01.2019 00:00
Updated 10.01.2019 08:00

It was a hectic 2018 ending for Italy and its relations with Europe. The bone of contention has been the status of the Italian economy and the budget law proposed by the League and 5-Star Movement (M5S), which is the so called "government of change."

After its establishment on June 1, 2018, as a result of electoral promises based on more independent and sovereign economic policies, it seemed clear that its real tenure test would be dealing with Europe. Already the first problem arose in assigning the Ministry of Economy and the European Union to the opposition of Italian President Sergio Mattarella to some names.

It was a political turmoil and, after six months, a new crisis erupted. Indeed, by approving the first budget law, the newborn executive body decided to raise the deficit roof 2.4 percent in order to have a wider margin of expenditure to start all major announced reforms.

After the European Commission had rejected, for the first time, the Italian budget draft at the end of October, Brussels reiterated its opposition based on a too optimistic estimate of the national deficit, but Italy chose not to follow the European order.

The European Commission, whose task is also monitoring the member states' budgets in order to avert the risk that some national policies can jeopardize the stability of the whole eurozone, opened the "infringement procedure" in relation to failure to comply with the debt reduction rule.

Indeed, the first warning arrived with a personal letter by the European Commissioner for Economic Affairs Pierre Moscovici highlighting an "unprecedented budget deviation in the history of the Stability Pact."

As expected, the Italian answer closed down to any further modification. The rejection was inevitable and the commission made an official amendment request. Thus, a new phase in relations between Europe and Italy started with the Italian "yellow-green" government willing to lower its deficit by presenting an official document of deficit revision to 2.04 percent.

Translated in a nutshell, in the latest version of law, there are 10 billion euros of expenditure less, recovered from some cuts to the main reform packages proposed by the two governing parties such as Reddito di Cittadinanza and Quota 100 and from some investments.

In order to meet Brussels' criteria, Italy had submitted a maxi-amendment where the state expenditure was increased from 852 billion euros to 869 billion euros. This will eventually lead to further expansive policies despite the downsizing decided to satisfy Europe.

However, the final response on the budget law will come only next spring. Then, the European Commission will express its views before proceeding to any judgment, although it cannot block what each state decides to implement in their maneuvers. Even if the request for a corrective procedure was disregarded, some sanctions could be triggered.

In this case, a fine from a minimum of 3.6 billion euros to a maximum of 9 billion euros would be inevitable or the European Council could also ask the European Investment Bank to stop financing Rome. In general, a great danger for a country like Italy could come from the markets too. In fact, while along with the rejection from Brussels there is a risk of facing sanctions or corrective measures, the criticism from investors and rating agencies could threaten economic stability as well. For the time being, the rating agencies have not downgraded Italy, but they have warned about a possible uncertain future.

Nowadays, the problem seems to be more political rather than economic. According to the Maastricht Treaty signed in 1991, the top deficit roof granted to member states is 2.4 percent to 3 percent while the GDP deficit is not more than 60 percent. At that time, Italy was able to join the eurozone with a much higher public debt that it has not been able to reduce. Since then, the Maastricht Treaty criteria have not changed; however, in 2010, the European Commission introduced a new concept of deficit, namely the structural deficit, excluding in its assessment the cyclical trends of the economy and some extraordinary events, such as natural disasters.

The structural deficit is the difference between real and potential GDP in a time of full employment and if there are no inflationary pressures. According to some parameters, every year, Brussels suggests to each member state the structural deficit roof. For Italy, it was settled at 0.6 percent for the year 2019, but the Italian government has proposed 0.8 percent.

In general, when the gap is small, it is easy for Brussels to impose a non-expansive budget forecasting further cuts to reduce the debt in a positive economic phase. This is not the case for Italy whose economic situation is just positively linked to the performance of its foreign investments.

Beyond the numbers, the contention between Rome and Brussels highlights their opposing economic policies. For the European Institutions, the Italian economy would be ready for a debt reduction through spending cuts, increases in taxes, for example value-added tax, and extension of the retirement age.

On one side, the Italian government finds means to boost the national economy and to relaunch its flywheel of growth. However, now that the agreement seems to have been reached, it can be perceived as a mutual political victory. On the one hand, Europe got a backward turn by Italy, although not fully satisfactory, as stated by the Commissioner Valdis Dombrovskis who spoke of "a final compromise, not ideal anyway," on the other, the two main pillars of the League and M5S are still the core bone of their economic policy.

Nowadays, the big question is what will happen next: In the medium term, will Italy have to bend under the overwhelming weight of an upward spread or will things go differently? Eventually, with the Britons' divorce deal on the doorstep, an American president not so sympathetic toward Europe and the current tariff wars, could the Rome-Brussels arm wrestling match open a new scenario within Europe?

* Assistant professor at the University of Turkish Aeronautical Association, Ankara

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