Excessive deficit, high and uncontrolled public debt, stalled reforms initiated in recent years, interventions (for example on pensions) that risk causing further debt , lack of projects and of long-term investments for growth. These are the main critical points highlighted today by the EU Commission that rejected Italy’s budgetary plan, moving closer to sanctioning the Country. Rome’s government gave a harsh reply, but the fact remains that Italy is now economically isolated, lacking the support of all EU Countries. According to Commissioner Valdis Dombrovskis, the budgetary plan would worsen the situation in the Country: “We continue to believe that this budget carries risks for Italy’s economy, for its companies, for its savers and its taxpayers. We are taking responsibilities today in the interests of the citizens of Italy.”
Insufficient clarifications. In the framework of procedures for the European Semester the European Commission outlined the general economic and social priorities for the EU, providing long-awaited assessments on draft budgetary plans and confirming for Italy the existence of “a particularly serious case of non-compliance” of the Stability and Growth Pact. Adopting opinions that evaluate euro zone Countries’ compliance with the provisions of the Pact, the Commission declared: “in the case of Italy, having assessed the revised DBP presented on 13 November 2018, the Commission confirms the existence of a particularly serious case of non-compliance with the Recommendation addressed to Italy by the Council on 13 July 2018.” The ensuing attempts to reassure the EU, (including the letter sent by Italian Finance Minister Giovanni Tria), were insufficient. Expectations are placed on the upcoming meeting of Italian PM Giuseppe Conte with Commission President Jean-Claude Juncker, set to take place on Saturday, November 24. Moreover, the opinions issued by the Commission today are yet to be examined by the EU Council of Ministers. The fact remains that the controversy between Rome and Brussels is serious, entailing negative consequences on financial markets and on Italian citizens’ savings.
Three delicate factors. The Commission thus carried out a new assessment identifying “non-compliance with the debt criterion”, states the document released today. “At 131.2% of GDP in 2017, the equivalent of €37,000 per inhabitant, Italy’s public debt exceeds the 60% of GDP reference value of the Treaty. This new assessment was necessary because Italy’s fiscal plans for 2019 represent a material change in the relevant factors analysed by the Commission last May.” The analysis contained in the new report – under Article 126(3) of the Treaty – highlights three aspects in particular. First of all “the fact that macroeconomic conditions, despite recently intensified downside risks, cannot be argued to explain Italy’s large gaps to compliance with the debt reduction benchmark, given nominal GDP growth above 2% since 2016”; second, “the fact that the government plans imply a marked backtracking on past growth-enhancing structural reforms, in particular the past pension reforms”; third factor, “the identified risk of significant deviation from the recommended adjustment path towards the medium-term budgetary objective in 2018 and the particularly serious non-compliance for 2019 with the recommendation addressed to Italy by the Council on 13 July 2018, based on both the government plans and the Commission 2018 autumn forecast.” In general, the assessment underlines that the debt criteria enshrined in the Treaty “should be considered as not complied with, and that a debt-based Excessive Deficit Procedure is thus warranted.”
Strengthening EMU. “The 2019 European Semester cycle of economic and social policy coordination begins against a backdrop of sustained but less dynamic growth in a climate of high uncertainty”, states the report presented by the Commission on the EU as a whole. “A lot has been achieved since 2014 but more must be done to support inclusive and sustainable growth and job creation while enhancing the resilience of Member States’ economies.” At EU level “this demands taking the decisions required to further strengthen the Economic and Monetary Union (EMU).” At national level, “there is a pressing need to use the current growth momentum to build up fiscal buffers and reduce debt.” Valdis Dombrovskis added: “”Europe is in good economic times, but rising risks indicate that this will not last forever. EU countries need well-targeted investments and renewed reform efforts to strengthen their growth fundamentals and increase productivity. On the budgetary policy side, it is time to reduce public debt levels and rebuild fiscal buffers. This will give us the room for manoeuver we’ll need when the next downturn comes.”
“Invest more in our people.” For Commissioner Marianne Thyssen “the economic recovery of recent years has been particularly job-intensive and unemployment is reaching record lows. At the same time, more and more people are participating in the labour market. The activity rate has reached a record high and has even surpassed that of the USA. The conditions are now in place for us to invest more in our societies, in our people, so that this recovery becomes permanent and benefits everyone, including the generations to come.”
On his part, Commissioner Pierre Moscovici pointed out: “The EU economy continues to grow at a healthy clip. Today’s policy advice from the Commission is about ensuring it stays strong and becomes more resilient – because in an increasingly uncertain global context, we cannot take anything for granted. A sustainably prosperous euro area needs not only sound public finances but also competitive economies and inclusive societies.”
Growth continues. According to the Commission, all Member States “are forecast to continue growing, though at a slower pace, thanks to the strength of domestic consumption and investment. Barring major shocks, Europe should be able to sustain above-potential economic growth, robust job creation and falling unemployment.” Yet the fact that the international situation is less favourable compared to the past, owing to political instability and protectionism-risk, requires due consideration. “The public finances of euro area Member States – the Commission goes on – have improved considerably and the aggregate euro area public deficit is now below 1%.” However “debt remains high in several countries”, notably Italy and Greece. “As the economy continues to grow, it is time to build up the fiscal buffers” needed to cope with the next downturn “and mitigate potential employment and social impacts.”