As if Brexit was not enough, Italy seems to be gearing up for a fight with the EU. This time it is not over membership but over budget. Although it is the third largest economy in Europe the national economy is still weak. The Bank of Italy has cut its 2019 economic growth forecast to 0.3% and its debt to the EU is €2.3 trillion ($2.6 trillion) accounting for 132% of its 2018 economic output.
As reported by Reuters, European Commissioner for Economic and Financial Affairs Pierre Moscovici said, while addressing a news conference in February, “Italy is in a special situation because it is a country with a very high debt level, and it is critical that debt does not start growing again.” Moscovici added, “It is therefore absolutely essential to implement a credible medium-term debt strategy that starts with 2019, but we will also in spring need to reflect on what 2020 will look like.”
Under EU rules any member state’s deficits should not exceed 3%, although members do exceed this from time to time. The EU has forecast a deficit of 3.5% for Italy for 2019 but it is quite possible that Italy will exceed this in its borrowing requirements. While recognising that Italian banks have had some success in reducing bad loans, this may be hard to keep up in what Moscovici described as a ‘weakening economic outlook.’ Should this happen, the question would form, what the EU can do in response.
The EU has a number of measures it can and has imposed on defaulting countries, like Greece, in the past. The EU can impose fines, cut funding and tell the Italian government to raise taxes and spend less. Most problematic, a negative response from the EU could affect Italy’s standing with the international ratings agencies. A downgrading of Italy’s credit ranking status with organisations like Standard and Poor, for example, can make borrowing on the international market more expensive.
Italian Prime Minister, Guiseppe Conte, is concerned to reach an accommodation with the EU over next year’s budget but the leading opposition parties, League and Five Star, are advocating greater spending on a minimum wage and alleviation of hardship and personal and corporate tax cuts to help grow the economy.
All this will not help the EU and Italy reach agreement over a budget.