Why Italy’s budget has caused a European row

Why Italy’s budget has caused a European row

IT DOES not seem much. The Italian budget for 2019 envisages a deficit of 2.4% of GDP. By comparison, the shortfall in Spain last year was 3.1%. And America’s budget deficit in fiscal 2018 was 3.9%. Though the gap between revenue and spending that Italy plans is inside the euro-zone limit of 3%, it has sent the European Commission and the guardians of the single currency into paroxysms of disapproval. The commission said Italy’s plans represent an “unprecedented deviation” from previously agreed targets. In a move that was itself unprecedented it rejected Italy’s budget and demanded a revision. On November 6th the commission’s vice-president, Valdis Dombrovskis, said it was considering imposing on Italy an “excessive deficit procedure”, for steering countries back on to what Brussels considers the fiscal straight and narrow. Failure to heed such strictures can ultimately lead to fines running to several billions of euros. Why all this fuss?

The roots of the standoff can be traced back to elections in March, when the anti-establishment Five Star Movement (M5S) took a third of the vote and the hard-right Northern League overtook Silvio Berlusconi’s party to become Italy’s leading conservative force. The M5S’s success was largely due to its promise of an income guarantee for Italy’s poorest. That of the Northern League owed much to the hard line it took on migration, but also to pledges it made to revoke an increase in the pensionable age and to simplify and reduce income tax. The proposals of the two parties, which formed a coalition in June, may have been popular, but they are costly. Even in watered-down form, they account for much of the increased spending in the 2019 budget.

Two things explain the virulence with which Brussels and the other euro-zone states have reacted. One is that the Italian deficit is three times bigger than pledged by the previous government. The other is a fear that it will add to the country’s already huge public debt (of more than 130% of GDP), sparking a crisis in the euro zone far more serious than the one triggered by Greece in 2010. The leaders of the two parties in Italy’s populist coalition, Luigi Di Maio of the M5S and the League’s Matteo Salvini (pictured sitting either side of the prime minister, Giuseppe Conte), pooh-pooh such fears, arguing that their expansionary budget will boost growth and thus the size of the economy. (The deficit is expressed as a percentage of GDP, so can be reduced by increasing GDP as well as by cutting spending.) Their government has put correspondingly optimistic growth projections into the budget. But given Italy’s track record of low growth since the turn of the century, and evidence to suggest the economy is yet again slowing down (third quarter growth was almost nil), others are sceptical.

The populist coalition has not set a date for introducing the income guarantee or the reduction in the pensionable age, so some room for compromise exists. But taking on Brussels is a vote-winner in increasingly Eurosceptical Italy. And, with the European elections looming in May, the M5S in particular is keen to bolster its support: since March, it has slowly but surely been overtaken in the polls by the League. A compromise is not impossible, but it will not be easy to achieve.

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