Brussels raises heat on Italy over 2017 budget
Commission gives Rome deadline to explain softening of deficit targets
Tension between Brussels and Italy over the country’s 2017 budget escalated on Tuesday after the European Commission imposed a 48-hour deadline on Rome to explain why it was breaking previous fiscal agreements.
Matteo Renzi, Italy’s prime minister, in effect, dared the commission last week to challenge him over a budget proposal that scraps the deficit reduction targets to which the country had committed itself this year.
While his planned budget would keep the deficit below the EU’s headline target of 3 per cent of gross domestic product, it breaks other fiscal guidelines and would require Brussels to grant an unprecedented amount of flexibility in how it applies eurozone fiscal rules.
The plans, announced by Mr Renzi 10 days ago, have created a political headache for the commission, which is responsible for reviewing the draft budget and has until the end of this week to decide whether to adopt a “negative opinion”.
Such a move would be unprecedented, and would threaten a severe rift with Rome at a time when Mr Renzi is facing a challenge at home, in the form of a surge in popularity for the anti-establishment Five Star Movement, and is weeks away from a crucial referendum on constitutional reform.
In a letter to Pier Carlo Padoan, Italy’s finance minister, sent on Tuesday, the commission requests “explanations for the revision of the targets and the substantial gap emerging with respect to the commitments made last spring”.
“Italy has benefited from significant flexibility under the rules of the Stability and Growth Pact both in 2015 and 2016,” the commission points out in the letter, signed by Valdis Dombrovskis, a European Commission vice-president, and Pierre Moscovici, the commissioner for economic affairs.
That flexibility “was granted subject to Italy … presenting credible plans to resume the adjustment as of 2017”.
Mr Renzi has insisted that the change of plans was caused, at least in part, by events beyond his control — notably August’s devastating earthquake in central Italy and the refugee crisis, both of which have placed a strain on public finances.
The commission is concerned that neither of these factors fully explains the sizeable gap between the 1.8 per cent deficit the country was targeting earlier this year and the 2.3 per cent shortfall it is aiming for now.
The letter is one of seven the commission sent to national capitals regarding their draft budgets, although the others address more minor issues — such as how to deal with the fact some countries were without fully functioning governments when their plans were submitted.
Given the deviations in Italy’s budget, few doubted that the commission would request further talks — a standard procedural step in such cases. Escalating the matter further, and adopting a negative opinion, would, however, be an unprecedented step likely to create a political storm.
Rome could ignore the opinion but it would provide an early signal of fiercer clashes to come. EU institutions have only a limited role in judging budget plans but they have far tougher powers to sanction past lapses in fiscal prudence, including the ability to fine national governments, although in practice this has never been used.
Despite calling on Italy to justify why it is falling short of agreed targets, Mr Dombrovskis and Mr Moscovici hint at some room for manoeuvre in their letter to Mr Padoan, noting that EU rules are flexible when it comes to the kinds of unforeseeable costs that Italy has incurred.
“The commission has acknowledged the exceptional nature of such expenditures in the past,” they say, adding that, nevertheless, Brussels “would need clarifications” on the amounts concerned.
“We would welcome your views by Thursday 27th October, close of business, to allow the commission to take these into account in its further analysis.”