Italy’s Government Set For Conflict With EC

The Eurozone now consists of 19 EU states which share the common currency, the Euro. In order for these states to benefit from the advantages of having a single currency which is accepted anywhere within the bloc at its face value, the members had to agree to certain economic constraints, designed to ensure the viability of the currency. These criteria, known as the convergence criteria required: price stability; sustainable, sound public finances; exchange rate stability and long term interest rates which do not deviate by more than 2% from the rates in the best three Eurozone economies.

Part of the convergence requirements set public debt to a maximum of 60% of GDP and that the deficit must be no more than 3% of GDP. All of the Eurozone members agreed to abide by these requirements, in the name of their nations.

With the Global Financial Crisis and (to a lesser extent) the European Sovereign debt crisis, the convergence criteria were not strictly enforced so that member states could have room to act to stimulate their domestic economies and protect jobs, but they remain in force and nations whose deficit or public debt levels exceeded the criteria were required to plan to meet them as soon as possible.

Italy has a coalition government between the right-wing League and the populist Five Star Movement. It has already clashed with the EU over its budget proposals which would have breached the deficit requirements. The European Commission has determined that Italy’s public debt stood at 130% of its GDP in 2018, more than twice the permitted level. The EC fears that the situation will worsen this year and next and is recommending that legal action be taken against Italy.

The responsible EC Commissioner, Valdis Dombrovskis claimed that the Italian economy showed “the damage recent policy choices are doing” and called on its government to reduce debt noting that a “renewed reform effort, not spending more where there is no fiscal space to do so” was needed.

Italy could face a fine of €3 billion , potentially. Italy’s government seemed sanguine with deputy Prime Minister Matteo Salvini saying:

"I'm sure that in Brussels they will respect our will. The only way to cut the debt created in the past is to cut taxes. Cuts, sanctions and austerity have only produced more debt, poverty, precariousness and unemployment. We need to do the opposite".

That would certainly be an unorthodox way of reducing public debt, but is one that would be popular with Italian citizens, of course.