The Italian government is once again at odds with the European Union regarding the fiscal policies outlined in Italy’s 2019 Budget. The proposition of tax cuts and spending promises has many in Brussels concerned that the state is not doing enough to pay off its debt and is heading towards a similar trajectory previously demonstrated by Greece. With political tensions rising, Italy seems to represent a cross roads for the EU: Will Italy soon have to endure similar penalties to those imposed on Greece? Will the threat of EU discipline be sufficient to instigate budgetary reform? Will Italy succeed in championing national sovereignty in difficult economic times? Or will Italy follow in the footsteps of the UK in taking steps to undermine the EU and remove itself from the institution entirely?
Since the Global Financial Crisis (GFC), Italy’s debt situation has increasingly worsened, somewhat under the radar as European headlines have been occupied with Greek debt and Brexit. However, with Italy’s debt reaching 132.2% of its gross domestic product in 2018, or €2.3 trillion, the EU Commission has set its sights on the Italian government and has threatened to force compliance with the Maastricht Treaty. Coming into force 27 years ago, the agreement outlines the fiscal measures and borrowing limitations of EU Member States, including a 60% of GDP debt ceiling which Italy is far exceeding. Last year, the technical recession faced by the Italian economy placed pressure on the government to comply with EU recommendations to curb spending promises outlined in its budget. This year, with economic growth being revised down from a forecasted 1% to -1% in the first quarter of 2019, the Italians have once again come under pressure to reform their fiscal measures in a similar fashion. The Commission, seeking to avoid the consequences of Italy defaulting on its debt, which is set to reach 135% of GDP by 2020, has threatened Italy’s coalition government with austerity measures if efforts to reduce spending or increase tax revenues were not pursued.
The EU Commission met early this month to decide whether the unprecedented action to enforce strict compliance with the Maastricht Treaty guidelines under an Excessive Debt Procedure (EDP) would be warranted. This followed a June 5 report by the Commission that concluded an EDP was necessary, and the EU Economic and Financial Committee supporting the report’s findings on June 11. If the EU were to follow through with an EDP, Italy would endure a fine amounting to 0.2%-0.5% of GDP (in excess of €3.5 billion), with the potential for the EU to then prevent supply of EU finance to the country and impose austerity measures. Given the severity of such punishment, it is evident that the EU’s patience with Italy is weaning. In response, Italy released a fiscal update at the start of July which demonstrated a €7.6 billion reduction in public spending which proved enough to avoid an EDP, for now.
The EU Commission has affirmed it will continue its stringent oversight of the Italian economy, and has promised that it will once again consider imposing an EDP if Italy demonstrates non-compliance with its debt reduction commitment. Given Italy’s poor economic situation, the government is conflicted between its fiscal policy aims to stimulate the economy and the EU’s insistence on debt reduction. This is particularly because both the nationalistic League Party (La Lega) and the anti-corruption 5 Star Movement (Cinque Stelle) parties that govern Italy are committed to their promises of sterilising an increase in the Value Added Tax (VAT) set to raise €23.3 billion, and introducing tax cuts of at least €10 billion. Due to the stark policy differences, tensions have risen and are set to worsen if these policy platforms are pursued in the October 2020 draft Budget announcement.
Italy’s government has demonstrated a determination to avoid any EU infringement procedures in 2018 and 2019, but Deputy Premier and League leader, Matteo Salvini, is adamant that the proposed tax cuts are necessary to ensure the Italian economy “runs” rather than “walks”. Similarly, Deputy Premier and 5 Star Leader, Luigi Di Maio, has warned that increasing taxes or reducing social security is non-negotiable as the government’s “responsibility and loyalty [is] to Italians” rather than the EU. The bullish attitudes of Italy’s leaders regarding their budgetary promises are likely to once again test the EU’s patience and cause fresh tensions later this year as the current tenure of the EU Commission comes to an end. Salvini will be hoping that the new tenure of the Commission commencing in November 2019 will provide an ample opportunity to exert Italy’s soft power in the EU to prevent detrimental action taken towards his country. This is due to his League party making considerable gains (28 seats) in the recently held EU Commission elections, forming part of the fifth largest bloc, the nationalist alliance deemed ‘Identity and Democracy’ (ID). Despite not being afforded a direct ability to prevent an EDP against Italy, the weakening of the centrist bloc currently dominating the Commission due to the increased support for nationalist parties in the recent European elections may provide the opportunity for ID to bring about a softer stance towards intervention in the affairs of EU members. Salvini has suggested a priority of the League within the new Commission would be to reform the “old and outdated rules” regarding debt levels, which his coalition partner Luigi Di Maggio has claimed favour countries such as Britain and France and undermine other nations including Italy.
These tensions have exemplified the fracturing of the EU and have called into question whether Italy will follow in the footsteps of the UK in leaving the Union all together. These fears, although seemingly far-fetched, have gained traction with the Italian parliament voting to adopt an Italian currency alternative to the Euro. Revived principally by League party members, the idea involves the Italian Treasury issuing small valued government bonds, called ‘mini-bots’, that can be used to by Italian businesses and citizens to trade as well as by the government to increase its expenditure or reduce taxes for its citizens. Some within the EU are concerned that in time, these bonds would become a functional parallel currency that would embolden the Italian government to threaten an ‘Italexit’ when negotiating the imposition of an EDP procedure. This is because under an EDP where the EU would halt European Central Bank financial assistance to Italian banks, the government could prop up the banks and the broader economy with this mini-bot currency, effectively removing its dependence on the Euro and easing a transition out of the Eurozone. However, those thinking that this parallel currency means Italy is in the midst of its own ‘Black Wednesday’ moment are likely mistaken. There still remains minimal appetite to leave the EU or the Eurozone within Italy, despite the population growing more sceptical of the organisation. Also, such actions could be politically disastrous for the League and 5 Star Movement, given that in Britain’s example the Conservative Party that exited the Eurozone had its reputation tarnished and were practically exiled to opposition for 13 years by the British People. Salvini and Di Maggio have some difficult choices ahead of them and what happens over the next 12 to 24 months could become pivotal for other struggling economies, and the fate of the EU itself.
The final EU response to Italy’s rising debt is yet to be witnessed, and the Italian saying for good luck, “in the mouth of the wolf” (In bocca al lupo), seems to describe the situation well. For those Italian citizens and parliamentarians that wish to see the promised fiscal stimulus implemented and an EDP prevented, the response to the good luck phrase, “death to the wolf” (crepi il lupo), seems to ring as loud as ever.
