Earlier this morning, we reported that according to Deutsche Bank economists – and virtually everyone else except for those who were apparently waving in BTPs yesterday – Italy was squarely on a collision course with the European Commission, whose President Juncker said yesterday that there would be a “violent reaction” from other euro area countries if the Italian budget were to be approved.
Moments ago, Spiegel confirmed this when it reported that the “dispute between the EU Commission and Italy’s populist government is entering the next round” after EU Commissioner Guenther Oettinger said that the EU Commission would reject Italy’s 2019 budget plan, which is not compatible with EU rules.
“It has been confirmed that Italy’s budget for 2019 is not compatible with the commitments that exist in the EU,” Oettinger said. The official rejection of Italy’s budget in the form of a letter from Economic and Financial Commissioner Pierre Moscovici is due to arrive in Rome on Thursday or Friday.
Italy submitted its budget draft at the last minute on Tuesday night, giving the Commission two weeks to respond, but it appears it won’t need that long. Moscovici will reportedly not to submit any counterproposals to the Italian budget, but merely point out the breach of the agreed framework data.
As a reminder, Italy’s coalition of a nationalist and populist forces plans to increase the country’s deficit to 2.4% GDP next year to finance its expensive campaign pledges. This is three times more than the 0.8% that the Italian previous government had agreed with the European Commission, and it could become even more, as the 2.4% forecast is based on the Italian government’s highly optimistic assumptions about economic growth.
Still, many have accused the EU of hypocrisy in cracking down on Italy while letting other, just as egregious budgets slide in recent years.
Commenting on the Italian budget, in an overnight note Goldman said that Italy is not the only country to deviate from the EU’s country-specific recommendations and be in breach of the fiscal rules, with the bank noting that France is also non-compliant with the public debt rule. “That said, the French budget does not breach the expenditure benchmark rule; moreover, France can justify its deviation from the structural adjustment path on the basis of the structural reforms it is implementing.”
