The European Union (EU) for the first time sent back a member state’s proposed budget because it violated the bloc’s fiscal laws and posed unacceptable risks. Italy’s coalition populist government had submitted a budget proposal last month to the EU which did not adhere to the European deficit reduction..
The European Union (EU) for the first time sent back a member state’s proposed budget because it violated the bloc’s fiscal laws and posed unacceptable risks.
Italy’s coalition populist government had submitted a budget proposal last month to the EU which did not adhere to the European deficit reduction targets.
Background
Italy is a unitary parliamentary republic in Europe. It is home to 61 million inhabitants. The country is the fourth most populous EU member state. Historically, Italy is perhaps best known for being the origin of the Renaissance. Italian culture flourished at this time, producing famous scholars, artists and polymaths such as Leonardo da Vinci, Galileo, Michelangelo, and Machiavelli. It was a period when great strides were made in science and art. It was also during this era when Italian explorers such as Marco Polo, Christopher Columbus, Amerigo Vespucci, and Giovanni da Verrazzano discovered new routes to the Far East and the New World.
Present day Italy is known as a vibrant tourist destination in Europe. It is the 3rd-largest national economy in the eurozone, the 8th-largest by nominal GDP in the world. Italy is also the eighth largest exporter in the world. In 2016, its nominal GDP was $1.850 trillion. Italy conducted 59% of its trade with other nations in the European Union.
Italy has also been influenced by the growing wave of nationalism and the 2018 General Elections saw the anti-immigrant, right-wing coalition led by Matteo Salvini and Luigi Di Maio come to power. The Centre-Right Coalition has been critical of the EU, been labelled as openly EU-sceptical and has been noted to be soft on Russia for its alleged meddling in foreign elections.
Analysis
Italy’s populist government refused to budge on Tuesday (Oct 23) after the European Union (EU) for the first time sent back a member state’s proposed budget because it violated the bloc’s fiscal laws and posed unacceptable risks.
The European Commission (EC), the bloc’s administrative body, had repeatedly warned Italy to reduce the deficits in its 2019 draft budget to avoid heavy fines early next year.
Italy’s government, which has bristled against Europe’s austerity measures, went ahead and submitted a budget with a proposed deficit equal to 2.4 per cent of gross domestic product (GDP). That figure was considered much too high for a country whose total government debt equals 131 per cent of GDP, more than double the eurozone limit.
As expected, the commission rejected the plan, saying that it included irresponsible deficit levels that would “suffocate” Italy – the third-largest economy in the eurozone.
Investors fear that the collapse of the Italian economy under its enormous debt could sink the entire eurozone and hasten a global economic crisis unseen since 2008, or worse.
Italy’s populists agreed on a budget that delivered on the priorities of both the Five Star, which sought a broad unemployment benefit, and the League, which wanted a flat tax for small business owners. It also included more generous pension benefits, allowing people to retire at 62 if they had contributed for 38 years, which both parties campaigned on.
However, Italy’s populists are not scared. They have repeatedly compared their budget, which focuses on unemployment welfare, pension increases and other benefits, to the New Deal measures of Franklin D. Roosevelt that helped America emerge from the Great Depression.
“The only thing that we have to fear is fear itself,” Mr Luigi Di Maio, Italy’s Vice-Premier and the leader of the anti-establishment Five Star Movement, told reporters as it became clear that the EC would reject the plan.
After the official rejection, Mr Di Maio wrote on Facebook, “We know that we are on the right path, and therefore we won’t stop.”
His coalition partner and fellow Vice-Premier, Mr Matteo Salvini, the leader of the far-right League party, was equally scathing.
Italy has three weeks to revise its budget under the bloc’s rules, but the EU’s unprecedented response may just be the instigation to a fight that Mr Di Maio and his coalition partners have been itching for.
Counterpoint
Mr Conte, Italy’s prime minister, sought to bring down the temperature as investor fears of a confrontation rose. He assured reporters at the foreign press club that Italy’s budget dispute with Brussels could be settled through negotiation, with a nod to former US president George H.W. Bush’s famous “read my lips: no new taxes” pledge at the 1988 Republican National Convention.
Assessment
Our assessment is that Italy is on the verge of political instability. The politics of populism is negatively impacting Italy’s economic situation and the budget deficit will have long-term consequences on an already indebted country. We believe that the EU is likely to approach the Italian government to negotiate on more ways to achieve the deficit reduction targets.
Read more:
1) Italy defies Europe with new Budget proposal: https://www.synergiafoundation.org/insights/analyses-assessments/italy-defies-europe-new-budget-proposal
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