Robert Harneis –TDO-(FRANCE)- European Union has rejected the Italian government’s budget in a challenge to the euro-sceptic government. The determination of the Italians to defy the current Eurozone economic policy has left them with no choice. It was that or a complete collapse of confidence in the Euro.

The budget chief Pierre Moscovici rejected the plans as he declared ‘public debt is the enemy of the people’ as he justified their action against Italy's government.

The European Commission was keen to warn Rome against any illusions of ‘breaking free’ with its fiscal stimulus program, which risks running their budget with a larger deficit.

After careful consideration, Brussels’ powerful executive says Rome’s plan present a ‘serious deviation’ from recommendations set by the European Council in July.

The Commission has asked Italy to submit a revised draft budget for 2019 within three weeks. Brussels bosses argue the proposal poses ‘serious non-compliance’ with the bloc’s tight fiscal policies.

Moscovici, said: ‘The opinion adopted today by the Commission should come as no surprise to anyone, as the Italian Government's draft budget represents a clear and intentional deviation from the commitments made by Italy last July.’

‘However, our door is not closing: we wish to continue our constructive dialogue with the Italian authorities. I welcome Minister Tria's commitment to this end and we must move forward in this spirit in the coming weeks.’

Italy's government, made up of right-wing Lega and anti-establishment Five Star Movement, are planning to run their budget at 2.4 percent of GDP as of 2019. So far, they have shown no signs of backing down.

Brussels has rejected the project as they say they fear Italy's growing public debt is a potential contagion for a Eurozone financial crisis. However, the Italian government has pointed out that the policies dictated by Brussels have resulted in growing Italian debt over recent years.

The European Commission is in difficulties also because it has allowed France and even Germany to break the rules when it suited them in the past. Furthermore, the Maastricht rules are that Government debt to GDP ratio should be no more than 60% and the average for the zone is 86%.

The fundamental problem is that the Euro is greatly overvalued for the southern European economies including France. This in turn restricts growth and increases unemployment. It remains a depressing fact that youth unemployment is higher in Italy than in Iran despite years of US economic sanctions. Without growth it is almost impossible to pay off debt.

The economic policy of the Eurozone is political because the Euro currency is one of the successes of the EU in world terms. But it is a failure in economic terms. Without an expansionist policy and growth Italy cannot pay down its debts.

Italy is in a very strong negotiating position with the EU precisely because it owes so much. Whilst much of the €2.3 trillion of government debt is held by Italian banks themselves, as Eurozone hatchet man, former President of the Eurogroup, Jeroen Dijsselbloem, pointed out on CNBC on last Friday. He implicitly threatened to ruin the Italian banks by the cutting off of future funding through the Target2 system as was done to Greece. But as he well knows this is bluff, first, because Italy already owes a huge €500 billion via the Target2 system, effectively to Germany. Any default on such a huge amount would not only bring down the Eurozone but perhaps the European Union itself. Secondly any failure of the Italian banks would be very unlikely to leave other European banks unharmed.

An added advantage of the Italian government is that, so far, the electorate is solidly behind them with 60% approval. This is not the case in Greece where Syriza’s support hovers around 25% of the electorate. A recent poll shows that if there was a referendum today 54% of Italians would vote Leave. No doubt the commission is hoping to wear down public confidence by fear mongering and dragging things out, as they have to some extent succeeded with the UK and Brexit.

The Commission is also trying to make it seem as if the present situation is the fault of the new anti-European government of Italy, whereas it is previous pro-European governments that have allowed the present situation to arise in conjunction with the Commission themselves.

In the meantime, the Italian government claims it has no intention of leaving the Euro only of reforming the Euro from within, whatever that means.

It is important to note that, unless the Commission takes immediate steps to cut off Italian funding, there is no immediate problem as the rejection of the Italian budget is the beginning of a long process that will take months to evolve. A lot of things could happen to the Euro in the meantime. There are already rumblings from Germany, within Chancellor Merkel’s party, that they may be ones to walk away from the Euro.

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