Robert Harneis –TDO- (FRANCE) - The European Commission has announced that it is launching an excessive deficit procedure against Italy. The Italian government has replied that it will not change its budget and that it may block Brexit negotiations until its budget is accepted.

In an attempt to calm the rising tension EU Finance Commissioner Pierre Moscovici said that ‘dialogue and coolness’ will now be needed more than ever.

‘With what the Italian government has put on the table, we see a risk of the country sleepwalking into instability,’ Commissioner Valdis Dombrosvkis warned.

The Commission recommended in July that Italy reduce its deficit by 0.6%. The draft budget presented by the Italian government though increases it by about 1% of GDP. ‘The numbers speak for themselves,’ Dombrosvkis concluded.

The Commission, therefore, confirmed that Italy’s blueprint for 2019 ‘is in serious non-compliance’ with the fiscal pact and warned that the impact of this budget on growth ‘is likely to be negative’.

‘In a situation of very high debt, Italy is essentially planning additional significant borrowing instead of the necessary fiscal prudence,’ Dombrovskis warned.

It is now up to member states to assess the Italian case and make a decision. ‘Frankly, it would be logic,’ Commissioner for Economy Pierre Moscovici told reporters.

‘This step that we take today is the unavoidable consequence of the decision made by the Italian authorities not to modify their fiscal targets in the revised draft budget plan,’ the French Commissioner highlighted.

The Eurogroup already backed the Commission decision to reject Italy’s draft budget earlier in November and will again discuss eurozone members draft budgets in two weeks.

Eurogroup President, Mario Centeno, warned that complying with the fiscal rules were ‘not only in each country’s individual interest but also in our collective interest’, when addressing the Italian case at the European Parliament on 20 November.

The Commission insisted it remains open to discussion with the Italian authorities but the reality is, as it says, it has no choice but to take a strong line because otherwise its credibility with other southern European nations with debt problems would be destroyed.

On the other hand, the Commission is well aware that it is playing a weak hand. The result of Italy religiously following EU economic policies have been disastrous for the country. There are European elections coming in May 2019 and every step the Commission takes to show its power other Eurozone nations economic policy is music to the ears of the anti- European parties. ‘Through the past months, the Commission’s commitment to dialogue with Italy has been genuine and it will always be genuine,’ Moscovici stressed.

The Commission is also aware that it has a huge democratic disadvantage in dealing with Italy. Moscovici is a former Socialist French Finance Minister. The Socialist party hardly exist in France today and the economic policy of the government he as a part of was a failure with miniscule growth and high unemployment. Exactly the problem Italy faces.

Dombrovskis is the former Prime Minister of Latvia a mini state on the Baltic, population 1.9 million, with the high-sounding title of European Commissioner for the Euro and Social Dialogue, Financial Stability, Financial Services and Capital Markets Union. However, thanks to the pro-European economic policies practiced there the country faces a falling population and 30,000 young people emigrating every year. Forced economic immigration is also a problem in Italy.

Neither Moscovici or Dombrovskis are elected. Facing them is the Italian coalition government with around 60% support in the polls. The Italian political leaders are backed by a team of top economists who firmly believe that Italy must break away from the current austerity policies in fashion in Europe that they believe have done Italy so much harm.

‘What is at stake is the future and prosperity of the Italian people,’ Dombrovskis proclaimed. That is precisely what the leaders of the Italian government, Salvini, Di Maio and Prime Minister Conte firmly believe their budget will achieve.

‘There are political lessons to be taken. The efforts made by the Greek people, the program itself, the accompaniment, the demands… all that pays off,’ said Moscovici, in self-congratulatory mode. But the brutal truth is that Greece has an economy that resembles a country that has just suffered some great disaster or a war, when in reality it is membership of the Euro that is the problem and the refusal of the European Commission to agree to adequate debt write offs for fear of hurting France and Germany. Most of the money loaned to Greece has gone straight back to France and Germany in the form of debt repayments. Greece has a level of debt that even the IMF believes is impossible to repay.

Now a source close to the Italian government has said, ‘Our main concern, right now, is to be backed on the budget proposal. On Saturday, Conte and Juncker will discuss it during a working dinner. Our position on all other EU dossiers will depend on the outcome of the meeting.’

Italy’s novice Prime Minister Conte has shown that he is not afraid to disrupt the EU’s agenda in a bid to move his country’s grievances to the front of the discussion queue.

The Italian government have played their cards with skill by making concessions that cost nothing but refusing to alter the essentials of the budget with a deficit of 2.4% of GDP.  The European Commission does not object so much to the size of the deficit as it is under 3% but rather that certain new measures will have a continuing deficit effect in future years. To compensate, the Italians have agreed to accelerate the privatization program that Salvini claims could bring in 18 billion euros, observing during a visit to Naples. ‘I am an optimist by nature’. They have also said that the deficit will be capped at 2.4%. This is a deliberate move to ridicule the Commission who are threatening a fine that would thus have precisely the effect of increasing the deficit that they object to.

The position of the Italian government is that their budget will promote growth, which they say, and well-known economists agree with them, is the only way to substantially reduce government debt. The problem is that it may also cause a surge in interest rates and thus a crisis in the Eurozone. Their weakness is that many Italians want to stay in the Euro as they are worried about a devaluation destroying their savings, this is particularly true of Salvini’s own League party. However, 60% now say they would favor leaving Europe if given the chance.

The great weakness of the Italian economy is not so much the very high government debt to GDP ratio but the high level of bad debts held by the Italian banks. The thinking of the Italian government is that their consumer friendly budget will create conditions that should improve the health of companies and therefore the bad debt situation.

The great negotiating strength of the Italian government is precisely that they owe so much money to the European Central Bank, with 500 billion euros owed through the Target2 system alone. An Italian default would bring down the Euro system. This may be the ultimate aim of the Italian government at the same time avoiding being the ones to trigger the crisis, preferring to let the European Commission take the responsibility. There is little doubt that the Euro system is totally inappropriate to Italy’s economic situation. Those that wish to preserve it do so for political reasons because they believe in a united Europe.

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