EU suggests infringement procedure against Italy on debt

The European Commission suggested to open a disciplinary action against Italy for not sticking to a promised path of debt reduction, major Italian media reported on Wednesday.

An excessive deficit procedure against Italy was justified, according to the European Union (EU) executive body, because of "Italy's non-compliance with the EU's debt rule in 2018," said Ansa news agency reporting from Brussels.

Besides, the Commission added it would not expect Italy to comply with such rule in 2019-2020 neither.

RECOMMENDATIONS

The specific country report was issued by the Commission along with its European Semester 2019 Spring Package, which contains recommendations to all of the EU member states on how pursuing a sustainable and inclusive economic growth.

"Following an assessment of all relevant factors, the report (on Italy) concluded the debt criterion... should be considered as not complied with, and a debt-based EDP (excessive deficit procedure) is thus warranted," the Commission wrote.

"Overall, the Council is of the opinion that necessary measures should be taken as of 2019 to comply with the provisions of the Stability and Growth Pact. The use of any windfall gains to further reduce the general government debt ratio would be important," it suggested.

Under EU rules, all member states are required to follow budgetary guidelines, including keeping their public debt below 60 percent of their GDP, or, in case of higher debt, to stick to a gradual and constant reduction path agreed with EU authorities.

Italy has the second largest debt in the EU after that of Greece, accounting for 132.2 percent of GDP in 2018 from 131.4 percent in 2017, according to the Economy Ministry's official figures.

"At around 132 percent of gross domestic product (GDP), Italy's high public debt ratio implies that large resources are earmarked to cover debt servicing costs to the detriment of more growth-enhancing items including education, innovation and infrastructure," the Commission explained.

In their report, Brussels' authorities also noted some of the reforms passed by Italy's current government since its inception in June 2018 would have actually worsened the country's growth perspectives.

"Italy's expenditure on old-age pensions, at around 15 percent of GDP in 2017, is among the highest in EU, and is expected to increase in the medium term due to the worsening old-age dependency ratio."

Furthermore, "the 2019 budget, and the decree law implementing the new early retirement scheme passed in January backtrack on elements of past pension reforms, worsening the sustainability of public finances in the medium term," the Commission said.

MIXED REACTIONS

From Vietnam -- where he is paying a two-day visit -- Prime Minister Giuseppe Conte was reported as saying he would try his best to mediate with the EU.

"I will do everything I can to avoid the infringement procedure," Ansa quoted the prime minister as saying in a press conference in Hanoi.

"The assessment of our public finances has highlighted an increase in tax revenues and social security contributions compared to estimates, and this may allow us to have more room and to better react to an economic trend that is not favorable," Conte said.

Less prudent appeared the first reaction by the two ruling parties supporting the cabinet, the right-wing League and populist Five Star Movement (M5S).

"We are not going in Europe to ask for some other countries' money... but to ask for spending our own money," Il Corriere della Sera daily quoted League leader and Interior Minister Matteo Salvini as saying.

"We will do everything to remain within (EU) parameters, but if your child is hungry... what are you going to do? You will respect the parameters and let your child starve, or you will go to your office manager and ask to review such parameters?" Salvini added.

Eurosceptic League has recently performed as Italy's best party in European Parliament elections here, and has repeatedly called for a change in EU's rules, and especially in the fiscal ones.

M5S leader and Economic Development Minister Luigi Di Maio called for respecting at any cost the flagship reforms his party has pushed so far through with the government.

"Quota 100 (the new pension reform) and the pensions of Italians cannot be touched," Di Maio warned on Facebook.

"We are serious people, and Italy is a serious country that keeps its word... as such, we will go in Europe (to Brussels) and sit at the table with a sense of responsibility."

However, the M5S leader claimed other EU countries would have boosted their deficit well beyond EU limits in latest years in order to reignite growth, and they were not penalized "by any sanction."

Italy barely avoided an infringement procedure over debt last year, and reached an agreement with the Commission only after long months of harsh negotiations.

Rome finally agreed to reduce its 2019 deficit target to 2.04 percent from a previously planned 2.4 percent, but proposed higher public spending for 2020.

NEXT STEPS

Now, the Commission's report will be revised by the EU's economic and financial committee, which has to decide by June 19 whether to agree on it or not.

If the committee agreed with the Commission's proposal of disciplinary action, a decision might be taken by EU finance ministers who were due to gather in the first half of July.