European Commission rejects Italy's 2019 budget plan

Ilustracija

European Commission (EC) rejected on Tuesday Italy’s budget proposal for 2019, saying it violated European rules on an “unprecedented” level, and asked Rome to revise it within the next three weeks or face disciplinary measures.

This is the first time the EC has rejected a country’s draft budget since it was given the authority to do so during the 2013 debt crisis.

“Today, for the first time, the Commission is forced to ask an euro zone member to revise its budget draft,” EC’s Vice President Valdis Dombrovskis told reporters, adding the Commission did not see an alternative, and that Italy had three weeks to submit a revised draft.

The proposal needs to be in line with the recommendations the EU Finance Ministers’ gave on July 13, requesting that Italy cut its structural deficit, cyclically adjusted, by 0.6 percent of its GDP.

Italy sent a letter to the EC on Monday, admitting the budget draft was indeed against the EU rules, but adding it would adopt it nontheless.

“The Italian government is openly and knowingly going against the commitments it has undertaken,” Dombrovskis said.

Italy believes increasing spending would boost growth, thus helping reduce national debt. But the Commission said the GDP growth forecasts were overly optimistic, which casts doubt on the projections.

“Experience has shown time and time again that higher fiscal deficit and debt do not result in long-term growth. And excessive debt makes your economy more vulnerable to future crises,” Dombrovskis said.

He added that, unless Rome changed its proposal within three weeks, the Commission was prepared to launch disciplinary proceedings against Italy. The move could lead to financial sanctions which, in theory, can amount to 0.2 GDP, or €3.4 billion for 2017.

“The following weeks will be a time of dialogue with Europe and the markets,” said Italian Deputy Prime Minister Luigi di Maio, leader of the populist Five Star Movement, which is ruling in coalition with the right-wing League party.

According to EU rules, the budget deficit cannot go over 3 percent GDP, while national debt cannot surpass 60 percent GDP.

The previous Italian centre-left government set a deficit target of 0.8 percent GDP for 2019, while Rome now predicts a 2.4 percent deficit for 2019, 2.1 percent for 2020, and 1.8 percent for 2021. Rome also set a target to reduce national debt to 126.5 percent GDP in 2021.

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