EU rejects Italy Budget plan but govt not budging

Proposed deficits breach bloc's fiscal laws, will 'suffocate' nation: Commission

ROME • In what is becoming a dangerous game of chicken for the global economy, Italy's populist government refused to budge after the European Union (EU) for the first time sent back a member state's proposed Budget because it violated the bloc's fiscal laws and posed unacceptable risks.

The European Commission (EC), the bloc's administrative body, had repeatedly warned Italy to reduce the deficits in its 2019 draft Budget to avoid heavy fines early next year.

But Italy's government, which has bristled against Europe's austerity measures, went ahead on Tuesday and submitted a Budget with a proposed deficit equal to 2.4 per cent of gross domestic product (GDP). That figure was considered much too high for a country whose total government debt equals 131 per cent of GDP, more than double the euro zone limit.

As expected, the EC rejected the plan, saying that it included irresponsible deficit levels that would "suffocate" Italy - the third-largest economy in the euro zone.

Investors fear that the collapse of the Italian economy under its enormous debt could sink the entire euro zone and hasten a global economic crisis unseen since 2008, or worse.

But Italy's populists are not scared. They have repeatedly compared their Budget, fat with unemployment welfare, pension increases and other benefits, with the New Deal measures of President Franklin D. Roosevelt that helped America emerge from the Great Depression.

"The only thing that we have to fear is fear itself," Mr Luigi Di Maio, Italy's Vice-Premier and the leader of the anti-establishment Five Star Movement, told reporters as it became clear that the EC would reject the plan.

After the official rejection, he wrote on Facebook: "We know that we are on the right path and therefore we won't stop."

His coalition partner and fellow Vice-Premier, Mr Matteo Salvini, leader of the far-right League party, yesterday maintained that Italy would not change its Budget. "Italians come first... Italy no longer wants to be a servant to silly rules," said Mr Salvini.


Italy has three weeks to revise its Budget under the bloc's rules, but the EU's unprecedented response may be the instigation to a fight that Mr Di Maio and his coalition partners have been itching for. Both the Five Star and the League ran for election this year in direct opposition to Brussels.

With European Parliament elections on the horizon in May, it does not hurt their cause to reintroduce the spectre of a bureaucratic boogeyman preventing them from stimulating the Italian economy and delivering their campaign promises.

All of which make for strong political arguments that resonate with angry Italian voters, who have yet to recover from the last debt crisis. Still, the markets are less moved by the talking points.

The question for Italy, and all of Europe, is how far Italy's government is willing to go. Brussels, too, must decide how strict it will be. Loath to let a member state slide for fear that it would loosen the ties that bind the union, its leaders must ask themselves if that is worse than an open revolt.

"Breaking rules can appear tempting at a first look," said Mr Valdis Dombrovskis, the EC's vice-president in charge of euro and financial stability. "It is tempting to try to cure debt with more debt. But at some point, the debt weighs too heavy and, at the end of the day, you end up having no freedom at all."


A version of this article appeared in the print edition of The Straits Times on October 25, 2018, with the headline 'EU rejects Italy Budget plan but govt not budging'. Print Edition | Subscribe