December 14, 2018

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E.U., in a First, Rejects Italy’s Proposed Budget

E.U., in a First, Rejects Italy’s Proposed Budget
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BRUSSELS — In a stinging and rare rebuke to a core member, the European Union sent Italy’s proposed budget back to its populist government on Tuesday, saying that it posed unacceptable risks to Italy and the eurozone.

The European Commission, the bloc’s administrative body, told Rome that it would have to rewrite its draft 2019 budget and reduce its deficits, or face heavy fines early next year.

It was the first time that the European Union had rejected the proposed budget of a member nation that uses the euro, setting up a confrontation between Brussels and the euroskeptic government that took power in Rome this year.

Italy has three weeks to negotiate with the commission and come up with a revised draft budget that meets the bloc’s guidelines, commission members said after a meeting in Strasbourg, France.

“The Italian government is openly and consciously going against commitments made,” said Valdis Dombrovskis, the commission vice president in charge of the euro and financial stability. Italy is guilty of “a particularly serious noncompliance” with eurozone rules, he said, and so “today, for the first time, the commission is obliged to request a euro area country to revise its draft budgetary plan.”

“The dialogue will continue,” said Pierre Moscovici, the commissioner in charge of economic and fiscal affairs. “Our door is open to dialogue.”

The Italian economy minister, Giovanni Tria, on Monday appeared to reject the commission’s demands, arguing that his government, an uneasy coalition of the populist Five Star and League parties, sees its budget as vital to rejuvenating the Italian economy, addressing social problems and keeping its promises to the voters, including tax cuts and increased welfare spending.

In reply to a warning letter from the European Commission last week, Rome said it would not back down from its plans to run a budget deficit of 2.4 percent of gross domestic product — triple the level that Italy’s previous government had agreed to.

It was thought to be the first time since the eurozone crisis exploded over Greece that a country using the euro has rejected a demand from Brussels to adjust its budget.

The European Union faces a greater number of serious challenges from member nations than at any time in its history. Britain plans to exit the bloc by the end of March, and the commission is exploring possible violations of the rule of law by Hungary and by Poland, where governments sharply critical of Brussels have curtailed judicial independence and press freedom.

But the financial markets are expected to be more of a force on Italian budgetary discipline than the European Commission. Interest rates on Italian bonds are already close to four-year highs, and European officials say Rome’s economic plans could raise its borrowing costs significantly, forcing the government to modify its proposals.

Italy is not Greece, however. Even the latest draft budget is within the eurozone guidelines of a budget deficit under 3 percent of G.D.P. But Italy’s cumulative debt is enormous — more than 131 percent of G.D.P. last year, far exceeding the guidelines of 60 percent. And the proposed budget would make that debt mountain worse, especially since Italy is not expected by Brussels to achieve the economic growth rates needed to reduce the debt.

The governing coalition in Italy came to power in June promising to confront Brussels over those eurozone guidelines, which are intended to preserve the economic stability of the region and its currency and to avoid a crisis of the kind that hit the euro when it became clear that Greece was hopelessly deep in debt.

The European Commission fears that allowing Italy, which has a relatively large economy, to egregiously break the rules will only encourage other countries to do so. At the same time, European officials are mindful that the Italian government came to office on an anti-Brussels platform and remains popular.

With European parliamentary elections next May, Brussels is trying not to galvanize populist parties across the Continent that portray the European Union as a threat to their nations’ sovereignty.

On Tuesday in Luxembourg, Klaus Regling, the managing director of the European Stability Mechanism set up to help avoid another Greek crisis, emphasized that the risks of contagion so far were small.

“There is a risk with Italy, we are worried about Italy, because the fiscal plans are not compatible with the E.U. framework,” he said in a briefing to reporters. “But Italy is not Greece, it does not have the problems that Greece had 10 years ago.”

Italy has a much larger economy; leaving aside debt payments, the budget has a surplus; and much of the debt is financed by Italians, not by foreign banks, Mr. Regling noted. And it would largely be Italian banks that would suffer, he said.

Mr. Tria, the Italian economy minister, told the commission that if growth faltered, the government could adjust its spending plans, but that was not considered a firm promise.

Despite the confrontation, Italian leaders have made it clear that they have no intention of pulling Italy out of the common currency.



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