Italy’s deficit procedure on hold. Dombrovskis: ‘Stability and reforms’

Brussels – No measures on public accounts against Italy, for now: the country is in the group – along with Greece, the Netherlands, Slovakia, Sweden, and Hungary – of those that “continue to present imbalances” in terms of deficits and “significant overall vulnerabilities.” However, “at this stage, no further measures are necessary under the excessive deficit procedure” initiated in July last year, according to the European Commission, which pardons the Meloni government while putting it under close observation. To avoid the hard-line and possible fines, it is now necessary to implement a rigorous reform agenda in compliance with the recommendations that the EU executive has drawn up for Italy.

For Italy, the decision is to put the procedure on hold, with the Commission ready to take appropriate action if what needs to be corrected is not corrected. It means that the country’s public accounts must be sorted out. “The main objective of the European Semester remains fiscal sustainability and macroeconomic stability,” Economy Commissioner Valdis Dombrovskis said when presenting the contents of the reports drawn up in the context of the economic policy coordination process. 

Italy in excessive deficit procedure. EU: “Accounts give cause for concern”

The reason for not proceeding further against Italy lies in the prospects for correcting the deficit/GDP ratio. The country will exceed the 3 percent threshold envisaged by the Stability Pact in 2025 (3.3 percent) but will return to the budget rules in 2026 (2.9 percent). However, reforms will also be needed because, Dombrovskis emphasizes, a “common effort for competitiveness is indispensable.

Specific recommendations, the usual ones remain valid

For Italy, competitiveness depends on improving and modernizing its national system. In its country-specific recommendations, the European Commission once again asks Italy for reforms that have so far never been completed and that have been the subject of long-standing calls: updating the cadastral system (which has been in place since the 1970s), reforming the justice system (there are too many lawyers and too few judges in the Republic), reforming and making the public administration more efficient, promoting gender equality in the workplace, cutting the tax wedge on labor, and encouraging more and better competition.

Taxes, a knot to untie

On the tax front, Italy is standing still. The European Commission again calls for decisive action against tax evasion, which “remains high” and implies the need to “combat undeclared work.” Moreover, the collected taxes do not serve a purpose beyond accounting. It is the case of energy taxes, which in Italy “are not designed to encourage the transition towards clean technologies.” In this sense, Brussels calls on Italy to “accelerate” the transition, particularly with more electricity from renewable sources.

 More generally, special regimes and the wide range of tax concessions, including value-added tax, make the tax system extremely complex and erode the tax base, resulting in significant revenue losses. Shifting the current high tax burden on labor to other under-utilized and less growth-damaging sources of revenue would help increase Italy’s economic potential.

Family policies are needed

Forward with the NRRP and cohesion

Now more than ever, the call on Italy to accelerate the implementation of the National Recovery Plan (NRP), including the specific chapter of RepowerEu, remains valid, as
Italy is one of the Member States with the oldest populations. However, now the need becomes even more pressing because of a 2026 deadline to use the Recovery Fund funds, which is just around the corner. Furthermore, there is a call to fully use the structural funds made available for cohesion policies.