Brussels rejects the budget Why is Italy challenging the European Union?

24/10/2018

Pablo Martín de Santa Olalla Saludes is a professor at Madrid’s Universidad Europea


These weeks have been characterised by the Italian government's growing challenge to the EU authorities, with budgets and deficit targets at the centre of the conflict. The former centre-left Executive, chaired by Paolo Gentiloni, had committed in the Economic Planning Document (known as “DEF”) to comply with a 2019 deficit target of 0.8%. However, Gentiloni’s party suffered a heavy defeat in the March 4 elections and, once a coalition government between two “anti-Establishment” parties (the Five Star Movement and the League) was formed, not only a new DEF was foreseeable, but also an upward modification of the aforementioned deficit target. Aware of this, the European authorities negotiated with the Italian Minister of Economy and Finance, Giovanni Tria, an increase from 0.8% to 1.6%, obtaining in exchange the latter's word that his government would comply with the Stability Pact. But last September 27, all this ended up blowing up when a new deficit target (2.4%) appeared in the DEF, a target that tripled the one approved by the previous government. How had such a change of position been possible?

In order to understand what happened, it is necessary to bear in mind that the two parties in the current coalition government triumphed (practically 50% of the votes between the two) in the last elections on the basis of two electoral promises which needed extraordinarily expansive budgets. On the one hand, the “citizenship income” offered by the Five Star Movement, and for which they wanted to grant a monthly income of 780 euros to families without economic resources (very abundant in the southern Italy that mostly vote for them). On the other, the implementation of a single tax rate (the so-called “flat tax”) of 15% in Italians’ personal income tax. All this, together with a promise that both formations offered equally (the repeal of the Fornero Law of 2011, which tightened the conditions for access to retirement), meant, in practice, an additional expense that highly reputed economists estimated at around 75 billion euros. We must clarify, in this sense, that, with the deficit target approved by the Italian government, this expenditure figure was reduced significantly, from 75 to 30 billion, which, nonetheless, was still excessive for the EU authorities.

The problem was that Italy, together with Greece, is the country that can least afford an increase in its national debt, which is currently estimated at 131.8% of its national GDP. In a country where each Italian has to pay on average around 35,000 euros and growth has also been stagnant for years, the volume of debt cannot be increased (Italy has not grown by more than 3% since 2000, and the forecast for 2019 is 1.2-1.1%). As was to be expected, the European Commission reacted forcefully by reminding Italy that it had to comply with its spending commitments, and European Ministers of Economy gave Minister Tría a resounding telling off at the meeting they held earlier this month in Luxembourg. What no one understood was that Italy could so significantly increase its level of public spending while its unemployment rate was, at that time, 10.6%, almost five points below that of Spain (which, however, has the national debt contained in 98.3% of its GDP).

The markets did not take long to react and the risk premium skyrocketed last week to 340 points, but the reality is that the Italian Executive warned on Monday 22 October that it did not intend to move from its position (the last offer was, instead of three consecutive years with the deficit target at 2.4%, to maintain this figure only in 2019, to move to 2.1% in 2020 and to 1.8% in 2021). What was the reason for this irremovable stance? Basically that the leader of the Five Star Movement (Deputy Prime Minister Luigi Di Maio) knows that “citizenship income” is key to preserving and even increasing the support obtained on 4 March (and that is why he has even accepted the fiscal amnesty proposed by the League, a measure always defended by centre-right parties and which constitutes a complete corruption for a party that has made “honesty” its main flag). It is also true that the leader of the far-right party (also Deputy Prime Minister Matteo Salvini) sees in this issue a unique opportunity to achieve his fundamental objective, which is none other than to provoke a break with the European Union, which he does not cease to attack because he does not believe in the process of European construction, just as Alternative for Germany, the National Front or the UKIP. Worst of all is that, at the moment, Salvini is precisely the most popular politician in Italy.

Certainly, the rejection of the budget by the EU authorities was to be expected, because last week the rotating president of the Union, the Austrian Sebastian Kurz, made it clear that the other European countries were not going to pay the electoral promises of either the Five Star Movement or the League. Last weekend (20-21 October), a final gesture of rapprochement was attempted, but in vain. The reality is that Italy is setting a new record but in a negative sense: for the first time in its history, the European Commission is returning the Italian budgets in their entirety, so that, during the month of November, the country can completely redo them and obtain the “approval” of the EU authorities.

What can happen from now on? It is difficult to predict, given that we are facing an unprecedented scenario. If events were to happen as in 2011, President Mattarella would have to ask the premier Conte to resign and entrust the formation of a government to his man of confidence at this moment, the former IMF’s chief economist Cottarelli, who was already called last May to try to form a government. The fundamental difference is that, in 2011, Forza Italia (FI) and the Democratic Party (PD) did epitomise a government majority that allowed Mario Monti to govern for a year and a half (from November 2011 to April 2013). Now, in contrast, that majority does not exist, because the current coalition government holds more than 50% of the votes in both chambers. Mattarella knows that he can count on the collaboration of the Democratic Party (because they already offered it through the interim secretary of the formation, Maurizio Martina, a few months ago) and surely also on the collaboration of Forza Italia and Italia’s Brothers, plus the votes of minority parties. However, unless there is a split in the Five Star Movement or the League decides to accept Cottarelli, the truth is that there is no alternative majority.

In that sense, the fundamental problem for President Mattarella, who is the one in charge of dissolving the Parliament and calling elections, as well as of forming government, is that Matteo Salvini, leader of the League, wants to go to elections as soon as possible because, at this moment, the centre-right coalition could obtain a sufficient parliamentary majority. We must bear in mind that only Salvini's party has around 33% of voting intention, when the majority is located at 40% (which would easily be reached with the votes of Forza Italia and Italia’s Brothers). But Mattarella knows that Salvini is a declared enemy of the process of European construction, and that commissioning him to form a government could mean the exit (or at least the attempt) of Italy from the European Union, and we are talking about the third economy of the Eurozone. And the worst thing is that, at the moment, the level of anti-Europeanism in Italy is higher than ever, with less than 50% in favour of remaining in a construction, the European one, in which Italy holds the category of “founding country.”

In any case, the situation cannot keep on like this much longer, as the risk premium is likely to soar above 400 points in a matter of days. Italian demands cannot be accepted either because, after them, it is Spain coming, whose risk premium has already risen by almost fifty points after having presented another draft budget in which public spending also skyrockets. We will see how this very serious conflict is resolved in a country, Italy, which has not assumed yet that it should be strongly self-critical about its decades of economic stagnation and stop blaming the European Union for the profound ills afflicting the country. Who would have thought that, in the 1980s, Italy was one of the world's leading economies? See it to believe it.


Translation by Javier Martín Merchán

#The national budget and public spending #Spain #Deuda #Italia #UE