The Italian government has told the European Commission that it plans to launch “a comprehensive plan of spending review and revenue enhancement” in a bid to avert a row over the country’s mounting debts.
Brussels wrote to Rome on Wednesday, expressing concern about its budget forecasts and warning the Italian government against its attempts to expand Italy’s budget. Earlier this week Matteo Salvini, Italy’s deputy prime minister and leader of the anti-immigration League party, called for a “fiscal shock” to boost growth, reigniting the stand-off with Brussels which had been suspended late last year when the two sides struck an agreement.
Brussels is poised to revive the disciplinary process against Italy should the government fail to convince the commission it is taking sufficient measures — such as cutting spending and raising taxes — to bring down a debt burden which is the second highest in the eurozone after Greece.
Rome wrote to the commission on Friday to respond to its latest budget warning. Giovanni Tria, Italy’s economy minister, told Brussels that “in preparation for the draft budgetary plan 2020 and in light of updated macroeconomic projections, the government is working on a comprehensive plan of spending review and revenue enhancement.”
“We recognise that in principle a higher primary surplus would be necessary in order to put the debt ratio on a clear downward path,” Mr Tria also wrote. “The question, however, is the timing and extent of the adjustment. The drop in global trade and manufacturing activity in the second half of 2018 was abrupt and deeper than expected, raising the difficulty of promptly introducing offsetting measures. At any rate, given continuing high unemployment and near-deflationary conditions, the introduction of restrictive fiscal measures would have been counter-productive.”
The commission is obliged to write to eurozone governments whose debt levels are above the mandated limit of 60 per cent of gross domestic product and which are not falling in line with previously agreed targets.
Its warning shot set up a fresh clash between the EU and Rome less than a week after Mr Salvini’s League emerged as Italy’s biggest party in Sunday’s European election, overtaking his coalition partner the 5-Star Movement to become one of the biggest national delegations in the new European Parliament.
In the aftermath of his election success, Mr Salvini promised to unleash a “fiscal shock” of tax cuts to stimulate the economy, which will be the slowest growing in the eurozone this year. Brussels expects Italy’s debt levels to rise from 133.7 per cent of GDP this year to 135 per cent in 2020.
Should Rome fail to convince Brussels that it will take action over its public finances, the commission and eurozone governments can start a disciplinary process which may ultimately result in financial sanctions, although no country in the eurozone has yet been fined for breaking budgetary rules.
On Friday Ignazio Visco, governor of the Bank of Italy, warned Italy’s political class not to make the EU its enemy. “We would be poorer if we made the European Union an adversary,” Mr Visco said in an address in Rome.
Mr Visco said that increases in public spending or reductions in tax revenues should be introduced in a sustainable way and argued that increasing the deficit could backfire if it drives up Italy’s bond yields.