Italy to respond to European Commission’s rejection of 2019 budget on Tuesday
Italy’s government will today submit a revised version of its 2019 budget to the European Commission.
The Commission rejected Italy’s first submission last month because it failed to meet deficit rules. The budget forecasted the 2019 deficit would reach 2.4% of GDP—three times the agreed-upon limit of 0.8%.
This increase is due to electoral promises made by a populist government that was elected in March. Then, the Five Star Movement pledged to introduce an expensive basic minimum wage for the poor, while the right-wing Northern League told voters it would cut income taxes.
Italy has a substantial debt problem. The country’s public debt levels sit at 131% of GDP, making it the fifth most indebted country in the world. Problematically, it’s also the eurozone’s third largest economy—meaning it’s ‘too big to fail’; creditors would be unable to refinance Rome’s $2.6 trillion in debt as they did for Greece in 2009.
Rome is unlikely to yield to budget pressure from Brussels today; Finance Minister Giovanni Tria insisted that the budget “fundamentals will remain the same”.
Over the short-term, expect the European Commission to begin proceedings to sanction Rome—likely via a multi-billion dollar fine. Over the long-term, Italy must rein in its spending and enact productivity-boosting reforms to avoid a cataclysmic fate.
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