Italy’s New Coalition Seeks to Break EU Impasse

Italy’s new ruling coalition government is attempting to send revised proposals for its budget to the European Union (EU) ahead of a summit of EU leaders in Brussels. The European Commission previously rejected Rome’s draft budget, which states that the deficit in the Italian coffers will swell to 2.4% of GDP in 2019. The Commission warned that the draft budget broke historic commitments from the Italian government to minimise borrowing and keep a lid on Italy’s vast public debt.

Many fiscal experts have warned that Italy’s precarious financial position is weighing heavily on the Eurozone’s debt. Italy’s €2.3 trillion national debt is the equivalent of 131% of the country’s GDP. If its economic policies fail to curry favour with the European Commission, this could pose huge problems to the European Central Bank – potentially even bigger problems than a no-deal Brexit, leaving the euro vulnerable against the US dollar.

The steady economic recovery experienced in Italy in 2017 and early 2018 has lost momentum somewhat since the coalition government of the 5 Star Movement and the nativist League have taken charge. However, this is not thought to be because of Italy’s new coalition and is more an indictment of the heightened global trade wars, volatile oil prices and a brake on the automobile sector.

However, the coalition’s fiscal plans did little to ease the financial tensions throughout the Eurozone. The coalition’s leading two parties are renowned populists and Eurosceptics, which has made negotiations between Italy and the European Commission even tougher. The Commission is required to uphold the EU’s fiscal rules that insist budget deficits are cut on a “structural” basis.

The Commission believes the Italian coalition’s draft budget would increase the structural deficit by €22 billion and is insisting on a deficit reduction instead. Whether that’s possible remains to be seen, with the coalition required to make far deeper spending cuts than the €8 billion it was looking to find in its draft proposals.

What if the EU and Italian government remain at loggerheads?

An inability to find common ground on a fiscal level would have serious consequences on both the EU and the Italian government. The EU will be forced to launch disciplinary proceedings against the Italian government for breaking the fiscal treaty designed to maintain stability throughout the Eurozone. The issue for Italy’s new leaders is that, while they want to avoid disciplinary action, they made various spending promises to their electorate and are keen to keep their financial pledges to loyal voters across some of Italy’s poorest regions.

Such promises included a reduction of the retirement age to 62 from 67 and the implementation of a “citizenship income”, offering a basic level of welfare for the impoverished and unemployed at €780 a month. However, introducing such lavish measures seems almost pie-in-the-sky maths when one considers the country’s national deficit. It seems almost impossible for Italy’s coalition to deliver its budget promises whilst keeping the European Commission on its side.