Just in time for the holidays and Italy’s Dec. 31st final deadline, Italy and the EU brokered a deal on the 2019 Italian budget. It’s been a long ride, with some last minute twists, and this eleventh-hour agreement is poised to avert the worst of all outcomes for both Italy and the EU. Nevertheless, some worry that the repercussions of the budget will be harmful in the long run.
Italy’s debt at 130 percent of GDP, is the second-highest in the 19-nation eurozone, and as such they are expected to adhere to certain rules when putting together their budget – rules that the current populist government flouted when they submitted their financial plans in October. But with France also increasing public spending due to pressure from the protests of the giles jaunes, Italy was able to wring certain concessions from the EU concerning their own budget spending proposals.
Valdis Dombrovskis, the European Commission vice-president responsible for the euro, announced that the agreement would leave Italy with a budget deficit next year of 2.04% of GDP, a drop from the earlier target of 2.4%. Much of the savings come from delaying implementing two main pillars of the new budget – increasing incomes and the rolling back of pension reforms. Still, these aspects of the budget are not eliminated, having been merely delayed, thus avoiding over-drastic changes.
The EU still has concerns – especially once these measures do come into play. “When these measures will fully come into force they will result in higher costs for the years to come. In 2020 and 2021, Italy intends to compensate the costs by (…) raising value-added tax (VAT). However, we know that in the past Italy has not activated this kind of safeguard. If this happens again large resources will need to be found elsewhere,” said Dombrovskis.
This compromise is still a significant concession over the EU’s preferred budget spending of no more than 1.6% GDP. To sweeten the deal, the Italian government promised to sell off public buildings, and impose stiffer fines and higher interest rates on tax dodgers, thus raising more capital. Italy also revised its economic growth forecast. Its previous assessment of 1.5% growth was seen as unrealistic, and although the revised projection of 1% is still seen as overly optimistic, it’s a more acceptable aggregation for the EU and international markets alike.
This deal does mean that Italy avoids financial penalties imposed by the EU, part of a process called “excessive deficit procedure”, as well as economic repercussions from the global market, that would hurt both Italy’s industry and their populace – what Dombrovskis called a “structural deterioration” in Italy’s finances. Investors had been on edge during the stand-off between Italy and the EU, fearing an economic disaster that would upset the entire European market. Before the compromise, members of Italy’s former centre-left government warned that the negative reactions of the financial markets to the current government’s rhetoric, were inflicting financial loss on the Italian people.
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However, a recently warming market, and rallying Milan-based stock, along with falling borrowing costs, indicate investors’ approval of the deal – and subsequent relaxation over Italy’s status. Italian debt also rallied, with borrowing costs on the benchmark 10-year bond touching 2.76%. This is the lowest level since September, which is before Rome first put forward its budget plans.
“Basically, this agreement is a victory for dialogue over confrontation,” said European Economic Affairs Commissioner, Pierre Moscovici.
“Let’s be clear — the solution is not ideal,” Dombrovskis noted. “But it avoids opening the excessive deficit procedure at this stage. And it corrects the situation of serious non-compliance with the stability and growth pact.”
Financial analysts at Barclays wrote a note to their clients, indicating that the deal shows that the Italian populist government had realised “the potential perils involved with Italy holding unreasonable fiscal policies and an anti-E.U. stance”.
The note also said, in response to the anti-EU rhetoric from the League and Five Star Movement, that “the experience of the past six months suggests the Italian government may be more mindful of the effects that anti-E.U. rhetoric can have, which is also a positive development in our view, albeit unlikely that a populist coalition such as this will fully abandon such a stance”.
Officials in Europe, eager to prevent market unrest or general chaos in other Southern EU states, have claimed the compromise as a symbol of Italy’s recommitment to the EU, and the euro. The Italian government, however, claimed that they had got what they sought, with Prime Minister Giuseppe Conte assuring Parliament, including heckling senators from the opposition, that the government never did anything to “betray the trust” of its voters. And contrary to what the EU claims, he said that plans for implementing the universal income, and lowering retirement age, would not be delayed. What constitutes a delay is hard to define, as no official start date for these programmes was ever settled.
Even so, even this compromise was hard-won. Matteo Salvini, Italy’s deputy prime minister, and leader of the League party, had earlier said he would not budge from the proposed 2.4% GDP spending limit in the original budget, “not even if baby Jesus arrives”. His rhetoric became more anti-EU, with comments such as “Italians come first,” and that “Italy no longer wants to be a servant to silly rules”. However, Salvini is happy to have avoided fines and censure from the EU. After the compromise was reached, he said “to have avoided the infringement procedure is the victory of common sense for the good of Italian citizens”.
Conte insisted that Italy’s debt remains under control, and that “the fundamentals of the Italian economic system are very solid. Of course we have a debt that inspires a certain fear, but it is under control and it is not so scary”, Conte said, adding, it’s offset by Italians’ high savings rates and Italy’s place as the second-largest manufacturing country in Europe.