Wednesday 26 June 2019

Eurozone battle: EU moves closer to punishing Italy over failure to tackle debt

Turmoil in Italy: Deputy Premier Matteo Salvini has vowed to change European Union’s budget rules. Photo: Bloomberg
Turmoil in Italy: Deputy Premier Matteo Salvini has vowed to change European Union’s budget rules. Photo: Bloomberg

The European Union took the first step toward disciplining Italy over its failure to rein in debt, intensifying a dispute with Rome and paving the way for an initial penalty of as much as €3.5bn.

In a report published yesterday, the European Commission said Italy hasn't made sufficient progress in reducing its mountain of debt in line with the bloc's fiscal rules, and that a disciplinary process is "warranted".

The step marks an escalation of the country's budget tussle that roiled markets at the end of 2018 and is a warning for Italy's populist leaders, particularly Deputy Premier Matteo Salvini who has vowed to change EU budget rules.

The ratio of the nation's debt to GDP will "rise in both 2019 and 2020, up to over 135pc, due to a large debt-increasing 'snowball' effect, a declining primary surplus, and underachieved privatisation proceeds" it said.

"While refinancing risks remain limited in the short-term, the high public debt remains a source of vulnerability for Italy's economy," the commission added.

The commission's move is only one step in a complicated process, which requires EU governments to weigh in several times. While any fine would be relatively small, an official reprimand from the bloc could spell further trouble for Italy.

EU finance chiefs would also have to say whether they agree with the commission's proposal - probably at their next gathering in early July.

At that point, the commission will have 20 days to say whether a "non-interest bearing deposit" of up to 0.2pc of GDP - around €3.5bn - should be demanded from Italy.

Marco Zanni, foreign affairs chief for Italy's League party, said the commission's action was politically motivated and repeated his group's call for the EU's rules to be changed.

"We're not concerned about the procedure, we will work so that there is no longer a political use of EU economic rules," Mr Zanni said.

"If we look at the numbers and at who doesn't respect the rules, there are other states which preach to Italy and which don't respect them."

Bloomberg

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