Italy may have to violate EU's debt requirement to implement proposed budget

Italy's plans for a significant increase in its budget deficit risks sparking a clash with the European Union.

Its eurosceptic government has targeted a budget deficit of 2.4 per cent of GDP for the next three years, which would imply no debt reduction, violating an EU requirement to cut it.

The European Union's excessive deficit procedure is triggered if a country has breached or risks breaching the deficit threshold of 3 per cent of GDP or has a debt of over 60 per cent of GDP that is not falling at a satisfactory pace.

Italy's debt-to-GDP ratio was 133.4 per cent at the end of the first quarter of 2018, according to EU statistics office Eurostat, the second highest level in the EU after bailed-out Greece.

BUDGET PLANS DUE BY OCTOBER 15

As part of the EU's "European Semester" policy coordination process, the European Commission makes an annual assessment of draft budgetary plans for the forthcoming years in October and November.

The plans of all 19 eurozone countries, including Italy are due to be presented to the Commission by October.

The Commission has three options:

1. It can give a positive response

2. It can call for revisions from a government

3. It can reject a budgetary plan. So far, this option has never been taken.

SANCTIONS BY SPRING?

If the Commission did reject Italy's budget, Rome would be required to change its plans.

But if Italy then refused to do so, the Commission would have to open sanctions proceedings against Rome.

That might not happen before spring because disciplinary decisions are usually taken only after final data is available in April.

A disciplinary procedure can end in fines for non-complying countries.

However, Rome is aware that France escaped sanctions despite being the subject of EU deficit proceedings for nine years. The Commission also spared Spain and Portugal fines in 2016 despite their excessive deficits.

Indeed, no country has ever been fined under these sanction proceedings.