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

Brussels – Italy’s public accounts now become a case as they are seen as unsustainable, putting Italy under special surveillance. “The opening of an excessive deficit procedure based on the deficit is warranted,” is the already announced verdict of the European Commission, which is now official. The EU executive initiates the procedure involving enhanced surveillance for seven countries, including Italy. The others are Belgium, France, Hungary, Malta, Poland, and Slovakia, joining Romania, for which the same procedure was initiated in 2020.

Paolo Gentiloni, commissioner for the Economy, tries to reassure. “This doesn’t meana return to austerity because that would be a terrible mistake.” It is, he explains, about “strengthening competitiveness, accelerating the implementation of national recovery and resilience plans, and taking the first steps in implementing our new economic governance.” But so is “the need for fiscal prudence.” No government spending, other than that ‘authorized’ for the twin transition and defense, in compliance with the new stability pact as also approved by the Meloni government.

There is lots of work to do because the excessive deficit procedure means reducing imbalances. Cutting spending through a credible strategy, monitored by Brussels, and recommendations to be followed to the letter. Italy is, therefore, officially ‘commissioned’. Or rather, not yet. It is only ‘pre-commissioned’ because there is only the intention to open the procedures, leaving it up to the Council to decide in a month’s time: “The Commission intends to propose to the Council to open deficit-based excessive deficit procedures for these Member States in July 2024 (specifically July 16, Ecofin day, ed.).”

The Commission’s move was a political one. The outgoing Commission President, Ursula von der Leyen, is seeking a second term and needs the support of leaders. The rule of law report has been postponed until July 24, after a vote that, according to the calendar, the House of Parliament may hold to choose the new President of the EU institution (July 18-19). Von der Leyen decides not to upset those whose votes she seeks. That is why the quantitative recommendations, those with numbers, targets, and debt reductions, are postponed. She does the bare minimum required by the Treaties to avoid rifts and open warfare with governments in their time of need for electoral purposes.

It changes little for Italy. It is under surveillance. Not least because Italy is worse off than Greece, which was saved from default by the Troika (EU Commission-ECB-IMF) with a tear-and-blood reform program: the deficit/Gross Domestic Product ratio is, respectively, 7.4 percent and 1.7 percent at the end of 2023. The former exceeds, and by a lot, the maximum threshold of 3 percent in the deficit/GDP ratio, a reason worth initiating the procedures. The second is safe. However, Brussels points out, “Greece and Italy still have imbalances after experiencing excessive imbalances until last year.” In both cases, “vulnerabilities have diminished but continue to raise concerns.”

According to the baseline ten-year projections produced by the Commission, without decisive action in Italy, “the debt ratio will rise steadily to around 168 percent of GDP in 2034,” says the technical report prepared in Brussels. A debt trajectory “sensitive to macroeconomic shocks.” In a nutshell, the debt sustainability analysis indicates “high risks beyond the medium term.” Not least because “Italian banks are still considerably exposed” in their balance sheets to sovereign debt and state-guaranteed loans, the technical note adds.

It’s time for Italy to do its homework, which means “rapid implementation of key reforms and investments set out in national recovery plans,” stresses Commissioner for an Economy that Works for People, Valdis Dombrovskis. Along with the translation into practice of country-specific recommendations, which for Italy remain the same as they have been for ten years: cadastral reform, fight against tax evasion, reform of the justice system, public administration and pensions, policies for gender equality, cutting the tax wedge, better access to credit for businesses, and de-bureaucratization, more liberalization.

“We look forward to receiving national fiscal structural plans from Member States that bring down debt and deficit and reflect today’s recommendations,” Dombrovskis said. The Meloni government needs to get to work. It will not be alone. But for Italy, the time for promises is over, and, paradoxically, Meloni has von der Leyen and her personal political interests to thank if only the pre-warning arrives. She has an extra month to work.

There is also a reminder for Italy about implementing the National Reform Plan (NRRP). “Implementation of the reforms and investments included in Italy’s recovery plan is underway, but their timely completion requires greater efforts.” No more governments at the beach. The country and its executive cannot go on holiday. It can no longer afford it.