May 27, 2019 / 2:10 PM / a month ago

EU likely to start disciplinary steps vs Italy in June over debt

BRUSSELS (Reuters) - The European Commission is likely to start disciplinary steps against Italy on June 5 over the country’s rising debt and structural deficit levels, which break European Union rules, two euro zone officials said on Monday.

FILE PHOTO: European Union flags are seen outside the EU Commission headquarters in Brussels, Belgium April 1, 2019. REUTERS/Francois Lenoir

“The mood is definitely for action,” one euro zone official, who asked not to be named, said.

The Commission - the guardian of EU law - can start disciplinary steps against a euro zone country that can end in fines if the country ignores EU limits on deficit and debt, on the grounds that excessive borrowing can threaten the stability of all 19 countries sharing the euro.

Italy narrowly escaped the EU’s so-called excessive deficit procedure (EDP) last December by striking an uneasy compromise with the Commission after an unprecedented clash over Rome’s 2019 draft budget that envisaged higher borrowing and spending to pay for election promises.

Italian Deputy Prime Minister Matteo Salvini said on Monday that the victory for his League party in European elections on Sunday gave his far-right party a mandate to push through tax cuts and fight for changes to EU budget rules.

Under the rules, called the Stability and Growth Pact, Italy must reduce its structural deficit, which excludes one-off revenue and spending and the effects of the business cycle, by 0.6% of output until it reaches balance or surplus.

It also has to cut debt every year by 1/20 of the difference between its current level and the maximum EU ceiling of 60% of gross domestic product, on average over three years.

The compromise struck late last year, which the Commission called “borderline” and “not ideal” allowed Italy to keep its structural deficit and debt unchanged, using a highly optimistic economic growth assumption.

But latest statistics data on 2018 and Commission forecasts for 2019 and 2020 show that Italy’s debt rose from 131.4% of GDP in 2017 to 132.2% in 2018 and will go up to 133.7% this year and to 135.2% in 2020.

The structural deficit, instead of falling, has been rising every year since 2015 and is forecast to go up further to 2.4% of GDP this year and reach 3.6% in 2020 unless policies change.

When the Commission made its deal with Rome in December, it penciled in a structural deficit for 2018 of 1.8% of GDP, below the 2.1% recorded in 2017. But it turned out to be 2.2%.

Officials said that when the Commission reviews Italy’s public finances on June 5, it is likely to declare that the country was in breach of the rules, and that EU finance ministers should start the EDP disciplinary process.

“I would not expect the Commission to give in to Italy’s demands for looser fiscal rules. Everybody knows that the situation in Italy is too risky for that,” one senior euro zone official close to the process said.

Another official familiar with the Commission’s thinking said that neither the EU executive nor EU ministers were ready to “tolerate such threatened flagrant breaches of the Pact” and that the rise in Italian debt in 2018 would be under scrutiny.

The Commission also expects Italy’s primary balance, or the amount of money the government has before debt-servicing costs, will drop to 1.2% of GDP this year from 1.6% in 2018 and tumble to only 0.2% in 2020 — a risky trend for a country with a huge public debt, which in proportion to output is second only to bailed out Greece in the EU.

Reporting by Jan Strupczewski; Editing by Francesco Guarascio and Hugh Lawson

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