BRUSSELS (Reuters) - The European Commission said on Wednesday that Italy’s growing public debt broke EU rules, opening the way to a possible disciplinary procedure that would trigger a clash with Rome’s anti-austerity government.
Brussels stressed the process could be stopped if Rome took steps to show it could start reducing debt, but initial reaction from Italian government suggested little appetite for a budget rethink.
“The only way to reduce the debt created in the past is to cut taxes,” said Deputy Prime Minister Matteo Salvini, leader of the right-wing League party, which calls EU fiscal rules obsolete and dismisses any need for belt-tightening.
That defiant approach not only irks the Commission, but also creates tensions in the government. Prime Minister Giuseppe Conte and Economy Minister Giovanni Tria, former academics who are not members of the ruling parties, favor compromise.
Italy averted the same procedure at the last minute in December by lowering an initial target for the budget deficit this year, but the Commission returned to the attack, saying the deficit and debt targets would both be missed.
“To be clear, today we are not opening a procedure,” the EU commissioner for the euro, Valdis Dombrovskis, told a news conference, saying that while a disciplinary process was “warranted”, other steps were needed to formally launch it.
Economics Commissioner Pierre Moscovici also said his “door is open” to change Brussels’ analysis, if Italy makes new commitments. He did not spell out exactly what these must be.
According to the EU procedure, European Union states would have to back the Commission’s assessment that Italy’s debt trend is unacceptable in the next two weeks. After that, Brussels could recommend starting the procedure, which could happen before a meeting of EU finance ministers in early July.
The final step could be fines, though this would be unprecedented and is considered unlikely. However, fights with Brussels would be expected to upset financial markets and increase Rome’s borrowing costs, raising debt even more.
Italian banks fell as much as 2.3% on the day early in the session before recouping some losses. The yield on Italy’s 10-year government bond rose sharply to a high of 2.631% before pulling back to 2.516%, down one basis point on the day.
Salvini’s fellow deputy prime minister, Luigi Di Maio, who heads the anti-establishment 5-Star Movement, said Rome was ready to talk to Brussels, but complained that the Commission was picking on Italy while letting other offenders off the hook.
France, Belgium and Cyprus have all been cautioned about their finances by Brussels, but are not under as much pressure because the Commission deemed their reform efforts sufficient.
“It’s very annoying that every day a new way is found to speak badly about Italy and this government,” Di Maio said.
Conte said fresh data pointed to a budget deficit of 2.1% of gross domestic product (GDP) this year, below the government’s own target of 2.4% and the Commission’s projection of 2.5%, and he hoped a disciplinary procedure could be avoided.
Italy’s public debt, the second highest in the EU in proportion to output after Greece’s, rose from 131.4% of GDP in 2017 to 132.2% in 2018. The League and 5-Star coalition took office in June that year.
The Commission estimates debt will rise to 133.7% this year and 135.2% in 2020, breaking EU rules that say it should fall. Rome sees it at 132.6% this year and falling to 131.3% in 2020.
The anti-establishment coalition says Brussels is targeting it for political reasons, arguing that many countries have run budget deficits and debt trends in breach of the EU’s rulebook, without ever getting the sanctions Italy is threatened with.
The International Monetary Fund identified Italy’s debt as a major risk to the euro zone economy, along with global trade strains and a hard Brexit, an EU document showed, anticipating a report the IMF will present next week.
The EU Commission, which is in charge of monitoring EU countries’ budgets, publishes reports on states that appear to deviate from agreed fiscal targets.
It said Italy had made only limited progress in addressing EU recommendations, and had backtracked on necessary reforms, such as a 2011 pension reform that the current government softened. The Commission said this “may negatively affect Italy’s growth potential”.
Reporting by Francesco Guarascio, Jan Strupczewski in Brussels, and Crispian Balmer and Gavin Jones in Rome; Editing by Robin Emmott, Kevin Liffey and Frances Kerry