The European Commission decided on Tuesday to reject the 2019 budget of the Italian government. A first. Rome has three weeks to revise his copy. Will she comply with the requirements of Brussels? What are the risks? Should we fear an "Italexit"? Response elements.
It's a first. On Tuesday, the European Commission rejected the budget of a Member State, that of Italy. Rome decided to maintain its deficit target of 2.4% of GDP for 2019, while its predecessors had committed to reduce it to 0.8%.
This level does not increase the Italian debt, which amounts to 131% of GDP - only Greece is above in the EU - but does not reduce it. Brussels fears that, in the event of economic difficulties, Rome will no longer be able to honor it.
Nevertheless, Rome is committed to reducing its deficit in the coming years: 2.1% in 2020 and 1.8% in 2021, by which time the public debt will be reduced to 126.5% of GDP.
It's a first. On Tuesday, the European Commission rejected the budget of a Member State, that of Italy. Rome decided to maintain its deficit target of 2.4% of GDP for 2019, while its predecessors had committed to reduce it to 0.8%.
This level does not increase the Italian debt, which amounts to 131% of GDP - only Greece is above in the EU - but does not reduce it. Brussels fears that, in the event of economic difficulties, Rome will no longer be able to honor it.
Nevertheless, Rome is committed to reducing its deficit in the coming years: 2.1% in 2020 and 1.8% in 2021, by which time the public debt will be reduced to 126.5% of GDP.
> Why is Brussels not satisfied?
With this budget, the Italian government will keep the deficit under the famous 3% threshold required by the European treaties. So why is Brussels not satisfied with the copy given by Rome?
Since the entry into force of the Fiscal Treaty in 2013, the Member States must commit to reducing each year their structural deficit (that is to say without the vagaries of the economic situation), supposed to better reflect the management of public expenditure by governments. But instead of reducing it, Rome has planned to increase it next year.
Brussels can be rather flexible with these rules. For example, France is also not in the nails, but its budget is unlikely to be retoque. To benefit from the indulgence of the Commission, it is necessary in return to apply structural reforms, which was done by the former Italian Prime Minister Matteo Renzi.
However, between the detachment of the Job Act this summer and the advancement of the retirement age to 62 (for 38 years contributed), the new government has obviously made the choice to return to these reforms. "He would have posted the same deficit saying 'we continue structural reforms', it might not have had the same answer" from Brussels, said Celine Antonin, economist at the French Observatory of Economic Conditions ( OFCE) specialist of Italy.
With this budget, the Italian government will keep the deficit under the famous 3% threshold required by the European treaties. So why is Brussels not satisfied with the copy given by Rome?
Since the entry into force of the Fiscal Treaty in 2013, the Member States must commit to reducing each year their structural deficit (that is to say without the vagaries of the economic situation), supposed to better reflect the management of public expenditure by governments. But instead of reducing it, Rome has planned to increase it next year.
Brussels can be rather flexible with these rules. For example, France is also not in the nails, but its budget is unlikely to be retoque. To benefit from the indulgence of the Commission, it is necessary in return to apply structural reforms, which was done by the former Italian Prime Minister Matteo Renzi.
However, between the detachment of the Job Act this summer and the advancement of the retirement age to 62 (for 38 years contributed), the new government has obviously made the choice to return to these reforms. "He would have posted the same deficit saying 'we continue structural reforms', it might not have had the same answer" from Brussels, said Celine Antonin, economist at the French Observatory of Economic Conditions ( OFCE) specialist of Italy.
> What are the risks for Italy?
Before discussing possible sanctions, Brussels gave Rome three weeks to review its copy. European and Italian officials will therefore enter a phase of negotiations. Even if the leader of the League and Minister of the Interior, Matteo Salvini, warned that he would not change "a comma".
If the two sides fail to reach an agreement, Italy would be placed under the excessive deficit procedure and risk a fine of up to 0.2% of its GDP, or about 3.5 billion euros.
To open this procedure, Brussels must wait until the Italian budget is voted in parliament. It could not be launched before early 2019. "In an election period (the European elections will take place next May, ed) the Commission has no interest in going too far to the clash," said Céline Antonin. According to her, Brussels "will open the procedure for excessive deficit, but things will happen very gradually." Financial penalties have never been applied. "It really should be that the dialogue is broken between Rome and Brussels and no middle way is found" to get there, says Céline Antonin.
Before discussing possible sanctions, Brussels gave Rome three weeks to review its copy. European and Italian officials will therefore enter a phase of negotiations. Even if the leader of the League and Minister of the Interior, Matteo Salvini, warned that he would not change "a comma".
If the two sides fail to reach an agreement, Italy would be placed under the excessive deficit procedure and risk a fine of up to 0.2% of its GDP, or about 3.5 billion euros.
To open this procedure, Brussels must wait until the Italian budget is voted in parliament. It could not be launched before early 2019. "In an election period (the European elections will take place next May, ed) the Commission has no interest in going too far to the clash," said Céline Antonin. According to her, Brussels "will open the procedure for excessive deficit, but things will happen very gradually." Financial penalties have never been applied. "It really should be that the dialogue is broken between Rome and Brussels and no middle way is found" to get there, says Céline Antonin.
> Will this threat prompt Rome to review its copy?
This event does not frighten coalition leaders Matteo Salvini and Luigi Di Maio, declaring that they will not give up. "I do not see the government backtracking, they knew what they were exposing upstream and it was not going to happen," said Céline Antonin. If they have chosen to increase public spending, it is to integrate their campaign promises, including flat tax and citizenship income . "They can not tell their constituents' all that was told you during the campaign, we do not do it." We understand that the Italian government can not capitulate on everything, right away, "says Eric Dor , director of economic studies at the IESEG business school.
Nevertheless, the Italian Government keeps repeating that it wants to initiate a dialogue with Brussels. "We still have a hand extended Italian side, although the rhetoric is tough on the European Commission, but we must not forget that Luigi Di Maio and Matteo Salvini are in permanent campaign," said Nadia Gharbi, economist at Pictet Wealth Management .
The government is attached to the figure of 2.4% deficit, but, to show his goodwill in Brussels, he could decide to review the content of its budget, said Céline Antonin: "The government can delay reforms or choose from put in place more gradually, "says the OFCE economist.
This event does not frighten coalition leaders Matteo Salvini and Luigi Di Maio, declaring that they will not give up. "I do not see the government backtracking, they knew what they were exposing upstream and it was not going to happen," said Céline Antonin. If they have chosen to increase public spending, it is to integrate their campaign promises, including flat tax and citizenship income . "They can not tell their constituents' all that was told you during the campaign, we do not do it." We understand that the Italian government can not capitulate on everything, right away, "says Eric Dor , director of economic studies at the IESEG business school.
Nevertheless, the Italian Government keeps repeating that it wants to initiate a dialogue with Brussels. "We still have a hand extended Italian side, although the rhetoric is tough on the European Commission, but we must not forget that Luigi Di Maio and Matteo Salvini are in permanent campaign," said Nadia Gharbi, economist at Pictet Wealth Management .
The government is attached to the figure of 2.4% deficit, but, to show his goodwill in Brussels, he could decide to review the content of its budget, said Céline Antonin: "The government can delay reforms or choose from put in place more gradually, "says the OFCE economist.
> Who could make him change his mind?
These elements leave the financial markets in the expectation. The rates Italy is borrowing on the markets, albeit already at very high levels, did not break the ceiling on Tuesday. "The decision of the Commission was expected," says Nadia Gharbi. "The markets are currently in mode 'we wait and we look'".
Some members of the government and parliamentarians are attentive to the evolution of the "spread" - the gap between the German rate, the safest, and the Italian rate. Above a certain level, the Italian Finance Minister has already warned that the budget could not be financed. In the Senate, the coalition holds only a narrow majority of eight seats, which might prove insufficient if the markets panicked. "The European Commission does not have the means to stop the Italians, the only thing that can push them back is the market," says Nadia Gharbi. "As long as there is no excitement, Rome is in a strong position," agrees Céline Antonin. "The market is the arbiter in this whole story."
These elements leave the financial markets in the expectation. The rates Italy is borrowing on the markets, albeit already at very high levels, did not break the ceiling on Tuesday. "The decision of the Commission was expected," says Nadia Gharbi. "The markets are currently in mode 'we wait and we look'".
Some members of the government and parliamentarians are attentive to the evolution of the "spread" - the gap between the German rate, the safest, and the Italian rate. Above a certain level, the Italian Finance Minister has already warned that the budget could not be financed. In the Senate, the coalition holds only a narrow majority of eight seats, which might prove insufficient if the markets panicked. "The European Commission does not have the means to stop the Italians, the only thing that can push them back is the market," says Nadia Gharbi. "As long as there is no excitement, Rome is in a strong position," agrees Céline Antonin. "The market is the arbiter in this whole story."
> An "Italexit" is it possible?
Can this showdown between Rome and Brussels bring Italy out of the euro zone? Italian Prime Minister Giuseppe Conte firmly dismissed the possibility on Monday: "Listen to me: for Italy there is no chance of Italexit."
If several economists close to the League have never hidden being in favor of an exit of the euro, "they form a minority current," says Eric Dor. "I do not think there is a hidden government plan to take such a road, it is only by accident that it could happen, by financial asphyxia like Greece in 2015."
As Klaus Regling recalled on Tuesday, the head of the European Stability Mechanism (ESM), Italy is "not the next Greece". In 2011, Athens had a debt greater than 170% of GDP and deficit of 10%, while a year later Rome was below 3%. Moreover, excluding interest on debt, Italy has even been in surplus since 2010.
If Italy can not bring down its debt, it is not because of a calamitous management of public expenditure, but of a lack of growth. The government has some reason to focus on fiscal stimulus, but the measures have to be effective. "The growth will be boosted in the short term, but in the medium-long term nothing is favorable", in the choices of the coalition, according to Nadia Gharbi.
Can this showdown between Rome and Brussels bring Italy out of the euro zone? Italian Prime Minister Giuseppe Conte firmly dismissed the possibility on Monday: "Listen to me: for Italy there is no chance of Italexit."
If several economists close to the League have never hidden being in favor of an exit of the euro, "they form a minority current," says Eric Dor. "I do not think there is a hidden government plan to take such a road, it is only by accident that it could happen, by financial asphyxia like Greece in 2015."
As Klaus Regling recalled on Tuesday, the head of the European Stability Mechanism (ESM), Italy is "not the next Greece". In 2011, Athens had a debt greater than 170% of GDP and deficit of 10%, while a year later Rome was below 3%. Moreover, excluding interest on debt, Italy has even been in surplus since 2010.
If Italy can not bring down its debt, it is not because of a calamitous management of public expenditure, but of a lack of growth. The government has some reason to focus on fiscal stimulus, but the measures have to be effective. "The growth will be boosted in the short term, but in the medium-long term nothing is favorable", in the choices of the coalition, according to Nadia Gharbi.
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