Roma, Italy – Tensions are running high after the European Commission warned last week it was ready to take disciplinary action against Italy for consistently breaching the EU’s debt rules and flouting warnings to cut its deficit and reduce its public debt.
The commission in a June 5 report highlighted the fact that Italy is not expected to meet its debt reduction targets in 2019 or 2020.
“This should not come as a surprise,” said Elsa Fornero, the Italian economist and former minister of labour, social policies and gender equality. “It is a result of the arm-wrestling that the government has chosen to engage in with the EU, ignoring its warnings and rules, and taking a confrontational stance.”
Days before publication of the report, Italy’s far-right interior minister Matteo Salvini took to social media to criticise the EU’s “obsolete” budget rules, bragging he would not let Brussels tell Italy what to do. Spurred by his recent success at the European elections – in which his League party won 34 percent of the Italian vote – Salvini promised to go ahead with his commitment to slash taxes, even though this would further increase the deficit.
“If my child is hungry and asks me for food, but Brussels says ‘No, Matteo, the EU rules say you cannot feed your child’, do you think I would respect Brussels’ rules, or do you think I would feed my child?” asked Salvini during a rally.
Fornero says comments like these “demonstrate great ignorance of how the economy actually works”.
“But this is also the attitude of a bully, of someone unwilling to back down in the face of hard evidence.”
Battle lines drawn
According to EU rules, no country should have a budget deficit larger than three percent of GDP or debt above 60 percent of GDP, but Italy’s public debt was 132.2 percent of GDP in 2018, and it is forecast to rise to 135 percent. The country’s annual budget deficit is also expected to be above the permitted three percent in 2020.
The commission’s report is only the first of many steps which could lead to what is known as an “excessive debt procedure” against Italy, which would result in fines of billions of euros. EU finance ministers will meet in Brussels on July 9 and are expected to decide on the formal opening of disciplinary proceedings against Italy. No country has ever been fined for excessive debt, and this would be the first procedure of its kind.
According to Marcello Messori, director of the LUISS School of European Political Economy in Rome, it is almost inevitable the procedure will go ahead: “If this is the case, the situation would be very serious for Italy, because the commission would demand gradual but very strict fiscal adjustments, which would weigh down on Italy for decades.”
But the commission’s demands, such as higher taxes and spending cuts, would be in direct contrast with the government’s plans. “The risk is that this could open up a new and completely unpredictable conflict between the European Commission and the Italian government,” says Messori.
“It’s unknown territory, and it is very worrying. In the past, some governments have failed to implement the EU’s directives, but refusing to commit at all is a different thing entirely. We are part of an economic and monetary union, so it is inconceivable that a member of the union would not answer to those who set the rules.”
According to Fornero, the government’s unwillingness to go back on its campaign promises could have wide-ranging negative impacts on the life of Italians.
This year, Salvini’s coalition partner Luigi Di Maio, leader of the anti-establishment Five Star Movement, pushed through “the citizen’s income”, an expensive welfare programme, while the League championed a flagship pension reform called “Quota 100”.
“The money to reduce debt will have to come from somewhere, so healthcare and education will end up paying the price for the government’s welfare measures,” explains Fornero.
In an attempt to find a way around limits on government debt, Italy’s coalition government has presented a controversial plan to adopt a parallel currency in the form of so-called “mini-BOTS”, small-value notes that could be used to pay taxes or to buy goods and services provided by the state. They could also be used by the government to meet overdue payments to its private-sector suppliers and, in theory, reduce its public debt.
But critics argue that the mini-BOT plan would just add to Rome’s debt pile. “Of course, it is necessary for this administration to pay off its debt, but why not just do it with euros? Mini-BOT or not, the debt goes up,” says Carlo Cottarelli, an Italian economist and former director of the International Monetary Fund.
Mario Draghi, the European Central Bank president, also weighed in last week, saying: “Mini-BOTS are either money and then they are illegal, or they are debt and then the stock of debt goes up.”
Economist Messori said the Mini-BOT scheme was “a very dangerous plan”.
“It is adding more debt, but it also forces the private sector to accept these bonds rather than what they are owed, which is a drastic act of financial repression. On the other hand, if mini-BOTS were used as money, of course, this would be illegal [under EU treaties] and would cause an even greater rift with the European Union.”
Some see the creation of a parallel currency as Italy’s first step towards leaving the eurozone. “Until two years ago, the idea behind mini-BOTS was that they would facilitate a transition away from the euro; the League now says that is no longer the case, but it is an ambiguous move nonetheless,” says Cottarelli.
Italy’s finance ministry failed to respond to requests for comment for this report.
In a report last week, Moody’s Investors Service wrote that they “consider the issuance of such mini-BOTS as a first step towards establishing a parallel currency and preparing for Italy to exit the euro area,” and that the fact that “the proposal has resurfaced at all is credit negative”.
The League and the Five Star Movement have both ruled out a departure from the EU, but with rising tensions and talk of a new currency, their commitment will be under intense scrutiny.