Political Analysis

The Italian government’s defiance against obeying the EU's rules that no European government can run a debt deficit of more than 3% of a countries total GDP is causing friction in Europe. The Italian government want's to raise the budget deficit above this limit to help kickstart the Italian economy and put “Italian citizens first” ahead of investors concerns of high debt levels in Italy.

 

Party leaders in the Italian coalition government signalled they will seek leeway from the EU to increase next year’s budget deficit, heading on a collision course with the European Commission and investors who want it cut.

The League, one half of the populist coalition government running Italy, is discussing a 2019 budget deficit that may run over the European Union’s 3 percent of GDP limit, whilst some members of the Italian government have been saying they were trying to reduce the debt below 3% to send a reassuring message about government spending plans. Italy’s European partners say that might not be enough.

 

The government is working on a three-year time frame and “we won’t do everything immediately,” Italian Deputy Prime Minister Matteo Salvini told financial daily Il Sole 24 Ore. Salvini, who’s the League’s leader as well as the interior minister, who reiterated a promise to respect “all” EU restrictions.

 

Following Fitch agency’s decision to lower the outlook on Italy’s debt rating on Friday (31 August), neither Matteo Salvini nor Luigi Di Maio – the heads of the League and 5-Star Movement respectively – backed away from promises to reduce taxes and boost welfare spending.

 

Salvini said on Monday (3 September) he wanted to increase spending, but not exceed the European Union’s deficit limit of 3% of gross domestic product. The previous day Di Maio stuck to 5-Star’s promise made during this year’s election campaign to introduce a universal income for the poor.

 

Party leaders talked about a deficit below the limit at a meeting on Tuesday but haven’t yet reached a final decision, said a senior party official, requesting not to be named discussing a private meeting. He declined to say whether the target could be below 2 percent. A top-level government meeting on the budget will be held Wednesday, Salvini said in an interview with Italian radio RAI.

 

That discussion misses the full picture, since Italy could be found in violation of EU rules even if it doesn’t breach the 3 percent limit. The EU’s fiscal rules require countries to maintain a deficit that allows them to reduce their debt if it is above 60 percent of GDP. Italy’s debt burden is over 130 percent of GDP.

The friction between the Italian government and the EU is making investors nervous as it could cause italy to break away from the European Union in similar way to how the UK voted to leave in 2016

EUROPEAN UNION