budget dispute between the Italian government and the EU Commission, the
guardian of the Euro Stability Pact, had escalated in the final weeks and
months of last year. The right-wing government of independent Prime Minister Giuseppe
Conte, supported by major coalition partners and Deputy Prime Ministers Luigi
Di Maio (Five Stars) and Matteo Salvini (Lega), had presented a budget proposal
for 2019, which provided for a 2.4% increase in new debt.
justified by ‘investment needs’ in Italy as well as by a wide range of costly
social policies, such as a minimum income of €700 per month for some 1.7
million vulnerable families. Also on the list were a reduction in the
retirement age to improve the job situation for younger job-seekers and tax
cuts for medium-sized companies.
guardian of the Euro Stability Pact, 'Brussels' rejected Italy’s budget proposal,
which would have nearly tripled the permissible increase in debt. After weeks
of hefty rowing and in the light of the EU’s threat to trigger the excessive
deficit procedure that (theoretically) could have led to huge fines in Italy,
'Rome' presented a modified budget with a new debt increase of ‘only’ 2.04%,
which was finally approved by Brussels.
face it: the solution on the table is not ideal’, admitted Commission
Vice-President Dombrovskis. ‘But it allows us to avoid an excessive deficit
procedure at this stage. And it corrects serious non-compliance with the
Stability and Growth Pact.”
opinion of observers, the EU was initially at odds with the not exactly
‘pleasant’ Italian government made up of staunch Eurosceptics. This is exactly
what the Italian side took advantage of in order to show their voters the unpopular
‘paternalism of Brussels’ in Italy shortly before the European elections.
the Italian coalition sits relatively firmly in the saddle. It was able to do
well in local elections and the opposition, especially anyone who has ever
participated in an EU-compliant ‘technocratic government’ (Governo Tecnico),
currently plays an insignificant role.
more alarming were initial signals from the financial markets that predicted
sharply rising interest rates in Italy should the redistribution and spending
hike actually become a reality. Given Italy’s sovereign debt, highly negative ‘Target
II’ imbalances (a kind of overdraft for central banks), weak productivity and
the latent instability of financial institutions as a result of around €300-400
billion in potentially bad loans, just to name just the main risks, a rise in
interest rates would be highly dangerous.
there is no eurozone mechanism which could stem an actual bankruptcy triggered
by a series of bank failures. On the other hand, Italy needs investment and
massive reforms, both fiscal and social. The job prospects for university-educated
younger people in the real economy, which is looking for tradespeople and
skilled workers, is very problematic, and creating a ‘younger’ workforce is
almost impossible because of Italy’s labour law. Company redundancies are
difficult, and as a result there is not much new recruitment. Unlike
‘networked’ big business, small and medium-sized enterprises face one of the
most rabid tax systems in Western Europe.
with Rome quickly calmed the financial markets and allowed the Italian
government the triumph of having largely won. In light of the complicated way
of achieving this, the chances of punishing Italy with billions in fines seemed
rather unlikely anyway. Social benefits that cannot be actually implemented in
Rome, will be used this year in the European election campaign.
same time as the Italian-European budget dispute, the ‘yellow vest’ social
protests in France escalated. President Emmanuel Macron was largely
disenchanted with social policy and was forced to make costly concessions. Its revised
new-debt target – higher in percentage terms than Italy, albeit with lower
overall government debt – exceeds that allowed by the Euro Stability Pact.