Commission rejects draft budget: EU and Italy on collision course


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This has never happened before: the European Union demands that the Italian Government revise its draft budget. The answer: “There is no way back.”

For the first time since the introduction of the euro, the EU Commission has been forced to reject a Member State’s draft budget and demand a new bill: “The Italian Government is openly and deliberately breaching its commitments to the other EU commitments. States, “said the vice-president of the commission, the Latvian Valdis Dombrovskis. Europe is based on cooperation and mutual trust – the common rules apply to all. Italy sent a budget to Brussels on Monday, foreseeing a deficit of 2.4% of GDP – three times more than had been agreed with the Commission. This was a departure that was “unprecedented in the history of the Stability and Growth Pact,” EU Finance Commissioner Pierre Moscovici had already stressed last week. Thus, the Commission “had no choice but to reject the budget,” said Dombrovskis yesterday.

The Italian Government now has three weeks to revise the draft and reduce the deficit to a level consistent with European budgetary rules. The populist ruling parties in Rome – the protest movement Cinque Stelle and the far-right Lega – do not think that they are adapting their budget now: “The rejection by the EU? That does not change anything, “said Vice Premier and Lega CEO Matteo Salvini. They understand and communicate the refusal as a declaration of war: “The EU is not simply attacking a government, it is attacking a people. And then they are surprised that the EU is in Italy at a historic popularity low, “said Salvini.

The EU Commission has little leverage to enforce the budgetary rules . After rejecting the budget, she will probably open an official deficit procedure against Italy in the coming months. Brussels could impose a fine of up to 0.2 per cent of annual economic output – that would be up to 3.4 billion euros. But such a process takes years and could easily fail at the veto of another country.

Matteo Salvini Roma 20/10/2018. Consiglio dei Ministri sulla Manovra Economica DEF. Rome October 20th 2018. Minister s Cabinet about the Economic and Financial Document. Photo Samantha Zucchi Insider photo PUBLICATIONxNOTxINxITA SamanthaxZucchi

The Italian government could rather be stopped by the financial markets: Due to the loss of investor confidence, the “spread” much quoted in Italy, the interest differential between Italian and German ten-year government bonds, has already risen to more than three percent. At the same time, the old bonds are losing value – a problem for the weakly capitalized Italian banks, which hold a significant portion of the sovereign debt in their books.

Whether the interest rates will continue to increase, should depend significantly on two dates later this week. According to experts, the ECB will confirm its intention to end the already reduced bond purchases program next year at its interest rate meeting on Thursday. As part of the so-called “quantitative easing”, the central bank, run by the Italian Mario Draghi, had bought over 350 billion euros of Italian debt, thereby helping to keep interest rates low. Draghi also expects a few words of caution from the government in his home country.