As widely expected, the European Commission has decided to open an infringement procedure against Italy, due to the out-of-control public deficit. Together with our country, six other states ended up under procedure: Belgium, France, Malta and Slovakia for the Eurozone and then Hungary and Poland. All these nations exceed the 3% deficit limit, the difference between expenditure and receipts in public spending, but none like us, who in 2023 reached 7.4% of GDP.
Heavy cuts
The opening of an infringement procedure means that Giorgia Meloni’s government will have to reduce the deficit-to-GDP ratio by 0.5% per year. For Italy, which has a nominal gross domestic product of around 2 trillion, this should mean cuts of at least 10 billion a year in the public budget. But they could be even more. This is because the infringement procedure will have to be combined with the paths to adjust the public accounts which will be decided on the basis of the rules of the new Stability Pact, recently approved by the EU governments.
“The infringement procedure requires a cut of 0.5%”, but if the overall situation shows a greater need for corrections of the accounts “then we will recommend a greater adjustment”, specified the Vice President of the Commission, Valdis Dombrovskis, in presenting the package. According to estimates by Bruegel, a political-economic think tank in Brussels, the fiscal adjustment for Italy with the new Stability Pact will be 0.6% per year in the case of a seven-year repayment (around 12 billion), of ‘1.08% in the case of a four-year adjustment (around 20). The calculation is based on EU executive forecasts released in May, market expectations for interest rates and other indicators.
End of tolerance
For almost four years the European Union’s fiscal rules had been put on hold, as a response to the crisis generated first by the coronavirus pandemic, and then by the war in Ukraine, but now we are once again having to respect the stringent Brussels constraints imposed by the Pact of Stability. But for the Commission it does not mean a return to normality, much less to austerity. “After almost four years of the general escape clause, our economic and fiscal policies enter a new cycle. This does not mean a return to normality, because we are not living in normal times. Even less, do we return to austerity, because this would be a terrible mistake”, said the European Commissioner for Economy Paolo Gentiloni.
Stability Pact: the rules change, but austerity remains
But beyond words, the fact that our country will be called upon to make major cuts is a certainty, also because it is not only the deficit that we must reduce, but also the debt, which is the second highest in Europe, over 137% and lower only than that of Greece which is 162%. And the limits imposed by the Stability Pact prescribe keeping it below 60%, not an easy task.
The next steps
To make the transition from the old to the new rules of the Pact easier, for the first time the various phases of the procedure have been broken up over a six-month period, from now to November. On Friday the Commission will send its recommendations on the actions to be taken to the States under procedure, and therefore also to Italy. Our country will then have until September 20 to present its plan, which is based on Brussels’ observations but which could also be different.
Then in November there will be the actual recommendations of the Commission, which will then be the moment of truth on what we will be asked to correct our budget. According to the new Stability Pact, we can move towards a four-year recovery plan, or a slower and more gradual one of seven. Negotiations between Rome and Brussels will establish what this will be.
Giorgetti downplays it
For the Minister of Economy Giancarlo Giorgetti, a fiery summer is therefore promised, but it is practically impossible that he can achieve corrections lower than 0.5%, even taking into account a whole series of safeguard measures, which include a greater tolerance for example if the spending overrun was made for example for investments in Defense. Furthermore, the Commission could also request reforms, which could affect key sectors for Italy.
For the moment Giorgetti plays it down. “The infringement procedure is not news, it was widely expected, we had already said so a year ago”, was the minister’s comment, according to which “with the boom in deficit induced by the exceptional measures we certainly could not think of being subjected to 3%”. For the Northern League representative, however, Italy would have started a path “of responsibility for sustainable public finance, which is appreciated by the markets and EU institutions”, and therefore “we will continue like this”.
