Italy Risks $4 Billion EU Penalty for Failing to Curb Debt

May 28, 2019 Updated: May 28, 2019

The European Commission is considering proposing a disciplinary procedure for Italy next week over its failure to rein in debt, which could pave the way for a 3.5 billion-euro ($4 billion) penalty, according to an official familiar with the matter.

The step could come as part of the European Union’s regular budget monitoring process, most likely on June 5, and would mark an escalation of Rome’s budget tussle with Brussels that roiled markets at the end of 2018. The official asked not to be named, as the decision hasn’t been finalized, while an Italian finance ministry spokeswoman declined to comment.

Italian bonds fell on the news, with the yield on benchmark 10-year notes climbing 12 basis points to 2.66%. The euro extended its decline to fall 0.1% to $1.1192.

Italian Deputy Prime Minister Matteo Salvini on May 27 indicated he’ll push back against EU demands when crafting his next budget. Salvini has the upper hand in the populist coalition after his party enjoyed a resounding victory in the May 26 European parliamentary elections.

“I’m told a letter from the European Commission on the Italian economy is on its way,” Salvini said in Milan. “I think Italians gave me and the government a mandate to completely, calmly and constructively re-discuss the parameters that led to unprecedented job instability, unemployment, and anxiety.”

Deposit Demand

The commission’s recommendation would be only one step in a long, convoluted process, which requires EU governments to weigh in several times. EU finance ministers would have to sign off on a so-called excessive deficit procedure recommendation, at which point a “non-interest bearing deposit” of up to 0.2% of gross domestic product—around 3.5 billion euros—could be demanded.

EU finance ministers would have to say whether they agree with the commission’s proposal—probably at their next gathering in early July. If Italy doesn’t comply with the deposit request, it would be a breach of EU law.

“I am waiting to read the letter from the EU, but the commission should acknowledge that people voted for change and growth,” Salvini said, when asked about the Bloomberg News report. “What is clear is that taxes won’t be raised, a VAT increase will not happen,” he said in an interview on La7 TV.

The final decision on further fines may not come for months after Italy is given time to correct its finances. The EU has never fined a country over its budget so far.

Under EU fiscal rules, the bloc’s members need to keep their deficit below 3% of GDP and debt under 60% of GDP. Countries with debt that exceeds that level need to be reducing it at a satisfactory pace. At 132% of output, Italy’s debt is more than twice the EU limit, and, according to the bloc’s executive arm, not falling fast enough.

The step by Brussels comes only a few months after the commission decided against launching a so-called excessive deficit procedure against Italy after the country’s populist government pledged to rein in some of its spending.

 

By Flavia Krause-Jackson

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