Italy Sends Revised Draft Budget To European Commission With Few Changes

The Italian government has resubmitted its draft budget, after the first version was criticized by the European Commission over its lack of compliance with EU norms on deficit reduction, but Rome has not given up on its high spending plans.

BRUSSELS (UrduPoint News / Sputnik - 14th November, 2018) The Italian government has resubmitted its draft budget, after the first version was criticized by the European Commission over its lack of compliance with EU norms on deficit reduction, but Rome has not given up on its high spending plans.

The Italian coalition government of Five Star Movement (M5S) and Lega has kept the deficit target of 2.4 percent, but it plans to sell off state assets to be able to reduce its debt faster.

Brussels would like Italy to lower its structural deficit by about 0.6 percent of GDP. Instead, the Italian government has proposed a budget that may increase it by 0.8 percent of the GDP.

Under EU guidelines, a country is expected to have a debt of no more than 60 percent of its GDP or to be working toward decreasing it. Italy's debt-to-GDP ratio is at 131 percent, the second highest in the European Union after Greece.

Tensions have been rising on both sides.

The European Commission's President Jean-Claude Juncker has voiced his concern in the last few weeks about the fiscal policy of Italy and its capacity to meet its financial obligations within the 19-nation eurozone.

Italian Vice Prime Minister Matteo Salvini immediately threatened to sue Juncker in the European courts for scaring off investors, increasing the borrowing costs of Italy and making the Milan stock exchange plunge.

The EU's commissioner for economic and financial policies, Pierre Moscovici, has called the Italian government xenophobic, claiming that Italy was "a problem" in Europe.

Despite the signs of discontent on both sides, European Central Bank President Mario Draghi expressed confidence in late October about the likelihood of an agreement between the European Commission and the Italian government over Rome's spending plan for the next year.

Claudio Borghi, a Eurosceptic economist and the chair of the budget commission in the lower house of the Italian parliament, said to Sputnik that he would like "Brussels and Rome to tone down their rhetoric and end their war of words."

"The room of maneuver in Brussels is getting tighter, but I do hope that good sense will prevail, and everyone will notice that this kind of budget is exactly what Italy needs to cope with its chronic lack of growth," the Italian lawmaker said.

A spokesperson for the European Commission admitted that the situation is "tricky."

"On the one hand, Brussels doesn't want a full-fledged clash with the Italian government, but on the other, it's impossible to green-light a budget like this one," the official told Sputnik.

Juncker has pointed out in an interview with the Italian news agency ANSA that there would be a violent reaction from other eurozone countries if Brussels were to accept Italy's draft budget as is.

Steven Woolfe, a British member of the European Parliament, agrees that Brussels is in a complicated situation.

"If Brussels agrees with the Italian demands, it opens a gaping gap in the EU's overall punitive system. Other countries are just waiting to get into it. If Brussels continues to show rigidity, the crisis will burst, by the fault of Brussels and in conditions where Italy, a net contributor to the budget, can stop financing the EU.

That would be the ultimate blow. But it probably won't come to that," Woolfe said.

Davide D'Antoni, a spokesperson for M5S, has stressed that Rome's position is not to "defy Europe." D'Antoni pointed to Italy's readiness to reduce debt through real estate sales.

The targets have remained unchanged in the revised version of the draft budget because of the government's commitment to boosting Italian economy's growth, D'Antoni explained.

"We believe that expansionary fiscal policies, financed by increasing deficit spending, will lead to a higher economic growth and better public finances. ... We have asked a 0,2 percent GDP flexibility request for exceptional events (storms/damages and the reconstruction of the Morandi bridge in Genoa)," D'Antoni told Sputnik.

Marco Zanni, a member of the European Parliament and of Italy's Lega, pointed out that the Italian constitution demands that the government and the parliament guarantee economic and social rights to Italian citizens.

The parliament gave the government full mandate, he said, to use fiscal space up to 2.4 percent deficit to pursue goals and policies outlined by Italian voters in the last general election.

"Previous governments followed fiscal and budgetary recommendations of the EU institutions, cutting expenses and increasing taxing. The result has been disastrous," Zanni went on to say.

The debt-to-GDP ratio surged to almost 132 percent, while the unemployment rate hit 12 percent amid anemic production growth.

"EU medicine failed in addressing problems of the Italian economy. It's time to pursue a different strategy with an expansionary fiscal stance to sustain Italian economic growth, as this budgetary plan is aimed to," Zanni said.

ECONOMY WITH A DASH OF POLITICS

According to Woolfe, the row between Brussels and Rome is political rather than financial.

"Brussels and Rome clash like two paper tigers, but the difference in public spending is to be counted in billions of Euros. Brussels threatens with infringement procedures, fines and shows its arrogance. But the real problem is not financial, it is not an accounting issue, it is political," Woolfe told Sputnik.

The new Italian government is much more skeptical toward the European Union that the previous one. At the same time, Prime Minister Giuseppe Conte said in late October as the row over the draft budget was expanding that Italy would definitely not quit the bloc or the euro.

"An Italexit would mean the end of the European union as we know it. Neither Rome nor Brussels want to take the initiative of a rupture," Woolfe said.

The major question that the battle over Italy's budget brings to the fore is this: should eurozone countries continue to tightly control their budgets, pursue austerity measures, reduce national debts? Or should they lead a more Keynesian policy, spending more, increasing the debt again, to provoke a spiral of economic growth?