Rising Controversies between Italy & EU over Budget Bill

Italy, 04 Nov - 04 Nov 2014
Commentary - How Italy continues to struggle reactivating its economic growth & why the government is on on a collision course with the European Union on its budget target. by Marco Calabrò
Budget bill causes tensions between Italian government and EU Commission


The Italian government issued its budget bill for 2015, and this sparked tensions with the European Commission. The budget is expansionary: the deficit is set higher than previously forecast and just below the 3% threshold of the Stability and Growth Pact. This runs against previous commitments by former Italian governments to reduce the deficit in order to get near to balance in the medium term.

Prime Minister Renzi stated that exceptional circumstances (a long and non abating recession) and the government’s commitment to structural reforms (mainly on labour market) justify a slower pace in the reduction of the deficit, in line with the flexibility of European treaties. The budget cuts the fiscal wedge on labour both for employers and employees, promotes other measures growth enhancing, at the same time cutting current public expenditures.

In accordance with European rules, the European Commission sent a letter to the Italian government, where it asked the government to explain why the budget does not respond to midterm commitments. Renzi decided to make the letter (which was classified as reserved) public, a move the outgoing President of the European Commission, Barroso, openly criticised.

However, it seems like a deal can be found with a slight reduction of the deficit in the budget.
Just few days earlier, the opposition party Five Stars Movement held a three day rally in Rome. On the occasion, the party leader Grillo clearly took an anti-Euro stance. So far, the party had just proposed a popular referendum on the European currency, but had not taken yet a definite position on the issue.

Commentary


Opinion makers, civil society organizations and the same European Commission had often called for the reduction of the fiscal burden on workers and enterprises, which is huge and harmful for the country’s economic competitiveness. For the first time since years, the new budget moves decisively in this direction, which is a good news.

There is the doubt that the amount of resources at disposal for fiscal incentives for new employment are not enough. Besides, it would be better if the government allotted the resources on fewer initiatives. Cuts in public expenses are partly nullified by new expenses: at the moment, financing tax cuts by deficit can be the right choice, due to the gravity of the recession, but in future expense reduction should be larger, with the aim of balancing the budget.

All in all, the central question remains whether such fiscal policies, together with structural reforms, are enough to reactivate the economic growth that has been lacking for a long time now.

Arguments about the opportunity of giving up the Euro are minortiarian among opinion makers, but they cannot be easily discarded, first because they are not void of economic rationale; second, because a main opposition party is now openly for the Euro-exit, as it is the case in France with the Front National. Italian governmental parties are firmly pro-Euro; if the recession does not come to an end in near future, they can face a serious electoral challenge by forces that, once in power, would lead the country out of the Euro. A diffuse debate about the common currency has not taken place in Italy since the financial crisis first began: this is unhealthy for a democratic country, when such a relevant issue is concerned.



Note: The views expressed in this Commentary are those of the author and do not necessarily represent the position of Cosmopublic.eu.

Renzi- Commentar
Source: Governo Italiano | CC BY 2.0

Matteo Renzi in Brussels


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