EU threatens Italy with disciplinary action over its rising debt load

The European Commission, the EU’s executive arm, announced Wednesday that disciplinary proceedings against Italy are warranted because it’s breaking fiscal rules over its rising public debt.

The Commission said that in its latest assessment of member states’ compliance with deficit and debt rules, it had concluded that when it comes to Italy “a debt-based EDP is warranted.”

An EDP stands for an “Excessive Deficit Procedure” and is an action launched by the European Commission against any EU member state that exceeds the budgetary deficit ceiling or fails to reduce their debts. If an EDP went ahead, Italy could face a fine of around 3 billion euros ($3.4 billion), according to some reports.

”(The report) concludes that the debt criterion is not complied with and thus a debt-based excessive deficit procedure is warranted,” Valdis Dombrovskis, the EU Commission vice-president for the euro and social dialogue, said at a press conference.

“To be clear, today we are not opening the EDP. First, EU member states have to give their views on ... the report and the (EU’s) Economic and Financial Committee has two weeks to form its opinion on our conclusions. But it’s much more than just about the procedure, when we look at the Italian economy we see the damage that recent policy choices are doing.”

Worryingly for the Commission, Italy (Europe’s third-largest economy) has the second-highest debt pile in the EU (expected to reach 133.7% this year) and was asked to explain why its debt had risen in 2018.

Dombrovskis said the Commission estimated that Italy’s spending to service its debts in 2018 turned out to be 2.2 billion euros higher than expected in its 2018 spring forecast. He added that the country pays as much toward its debt servicing as it does toward its entire education system.

“Growth has come to almost a halt ... and we now expect the Italian debt (to GDP) ratio to rise in 2019 and 2020 to over 135%,” he said.
Italian banking stocks fell 1% on the announcement Wednesday and the country’s bond prices (the amount investors will pay to hold Italian debt) also declined, signaling a drop in risk appetite toward the country.

The Commission presented what is known as its Semester 2019 Spring Package on Wednesday which amounts to 27 country-specific recommendations which set out the Commission’s economic and social policy guidance for member states for the next 12 to 18 months.

Italy’s coalition government — a fractious alliance between the euroskeptic Lega party and anti-establishment Five Star Movement — has been on a collision course with the European Commission since it announced its 2019 budget plans which foresaw the coalition increasing spending and breaking a budget deficit target previously agreed by the former government.

The coalition initially agreed to lower its deficit target, to 2.04%, but then revised this upwards again.

The friction has put Economy Minister Giovanni Tria in a tricky position trying to navigate between Lega and M5S leaders’ demands for more spending and the Commission’s demands for less. He promised the Commission that the 2020 budget would be compliant with the Commission’s rules.

It’s likely that the EU will want to avoid launching punitive measures against Italy given concerns over rising euroskepticism in the country. EU Commissioner Pierre Moscovici said Wednesday that the “door remains open to avoid a disciplinary procedure against Italy.”

Italy’s Prime Minister Giuseppe Conte (who does not belong to either the Lega party or M5S) said he would do his utmost to avoid any EU procedure, Reuters reported.

Earlier on Wednesday, however, the Lega party’s economic chief Claudio Borghi said the party would not accept any tightening measures this year and that Tria must take “a hard line on EU budget talks,” Reuters said. Whether that bullish stance will continue in the face of potential punishment from the EU remains to be seen.

The possible next steps

June 11-19

After the EU Commission’s opinion on Italy’s debt justifying a procedure, EU financial ministry officials on the bloc’s Economic and Financial Committee have two weeks, until June 19, to decide whether to back the EU executive’s assessment. The decision is expected to come before regular meetings of the bloc’s finance ministers on June 13-14.
If national officials back the debt report, the Commission could at any time recommend the formal opening of a disciplinary procedure.

June 20-21

EU leaders meet in Brussels for a quarterly summit. The meeting could offer Italian Prime Minister Giuseppe Conte a chance to discuss the possible debt procedure with the outgoing Commission president, Jean-Claude Juncker.

July 8-9

EU finance ministers gather in Brussels for a regular monthly meeting, where they are expected to decide on the possible formal opening of disciplinary proceedings against Italy, if recommended by the Commission.
Once the procedure is started, Italy will be required to adopt measures, such as higher taxes and spending cuts, to correct its deviation from fiscal targets within three or six months from the beginning of the procedure.

July 29

If the EU finance ministers open a disciplinary procedure, July 29 would be the deadline for the Commission to propose what would be unprecedented financial sanctions against Rome. If deemed in “serious” breach of EU rules, the Italian government could be required to lodge with the Commission a non-interest bearing deposit worth 0.2% of GDP - around 3.5 billion euros.

Aug. 7

Euro zone governments would have 10 days, until Aug. 7, to block by qualified majority a Commission proposal to impose sanctions.

Sept. 20

Italy presents updated growth and public finance targets, which will be the framework of its 2020 budget.

Mid-October

First possible deadline for Italy to meet, in its 2020 draft budget, the fiscal requirements imposed by the EU in the disciplinary procedure.
Failure to act could trigger further sanctions, including a fine of up to 0.2% of GDP, the suspension of billions of euros in EU funds and closer fiscal monitoring by the European Commission and the European Central Bank.
Further failure to cooperate could incur even stricter penalties. Those might include a fine of up to 0.5% of GDP, a cut of multi-billion-euro loans from the European Investment Bank, and EU precautionary monitoring over Italy’s plans to issue new debt.

Nov. 1

The new Commission is expected to take office, unless the mandate of the existing executive is extended.