EU challenges Italy's populists over spending

The European Commission has published a report challenging Italy’s fiscal behaviour, paving the way for disciplinary action and a heated confrontation with Rome.

The report finds that Italy is failing to meet targets designed to curtail states’ spending, and predicts that it is on course to fall foul of the EU rule that limits nations’ deficit - the size of the gap when a government spends more than it earns - to 3% of GDP.

As the Financial Times explains, “the European Commission report effectively marks the first stage in a convoluted process that could lead to Italy being placed in a formal ‘excessive deficit procedure’ and even end with the country being fined (though this last step would be unprecedented and is extremely unlikely).”

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The EU’s report marks a significant escalation in a budget dispute that has been fought for some time. Italy’s economy is troubled: growing too slowly, debilitated by a debt worth 131% of GDP, all with a banking sector stung by the 2008 financial crisis, too fragile to invest with any confidence.

At the core of disagreement between Rome and Brussels lie conflicting theories on how best to lift Italy out of its economic malaise. The EU encourages - some would say coerces - member states to practice fiscal responsibility.

As Valdis Dombrovskis, the European Commission vice-president responsible for the euro, said, “We know there is a path to recovery and growth to Italy. This path follows a renewed reform effort, not spending more where there is no fiscal space to do so.”

In contrast, Matteo Salvini, deputy prime minister and leader of the far-right League, Tweeted on Wednesday that “we need a fiscal shock, we need to do the opposite of what has been done so far with the policy of cuts, austerity and constraints”.

“The anti-establishment coalition says Brussels is targeting it for political reasons,” Reuters reports, “arguing that many countries have run budget deficits and debt trends in breach of the EU’s rulebook, without ever getting the sanctions Italy is threatened with.”

However, as the New York Times points out: “Italy’s case is especially troublesome because of its stagnant economy and populist-run government, which has promised to cut taxes further while increasing spending to satisfy its voters and to try to get the economy growing. After years of zero growth, growth this year is estimated at just 0.1 percent, compared with 1.1 percent for the eurozone as a whole.”

Italy’s government is a coalition of the League, lead by Salvini, and The Five Star Movement, run by Luigi Di Maio. Both are euro-sceptic, and both formed a government, says the Financial Times “by sanding down mutually incompatible policy promises (such as sweeping tax cuts and ambitious new spending programmes).”

They installed Giuseppe Conte as a neutral, technocrat prime minister, to mediate between them. Conte, however, is more aligned with Brussels than his two deputies. The Guardian reports that “on Monday, the Italian prime minister, Giuseppe Conte, warned his two deputies, Salvini and Luigi Di Maio from M5S, that he would resign if they continued to try to flout the EU’s rules.”

In theory, the EU could fine Italy if it continues to disregard its debt regulations, but as Sky News says, “ever since the EU's fiscal rules were set, it has never punished a member state for breaking the rule on excessive debt. Nor has it fined any country for breaking the deficit rules.”

Of course, any financial sanction would be further ammunition for Salvini's anti-EU messaging, which carried him to a resounding success in last month's European elections.

The fine, though, Bloomberg argues, is not the only damage this week’s events could entail: “Even if Italy eventually evades a financial penalty, the stigma of the disciplinary process casts a shadow over its engagement with EU business and may reduce the Italian government’s leverage in everything from the scramble for European Central Bank board seats to its ability to negotiate politically thorny issues in Brussels.”