The Italian government would rather wait for a signal from the EU before announcing new deficit plans.
The Italian government hopes for signals from the European Union in favour of more stimulus before increasing its projected budget deficit in coming months in response to the economic impact of the war in Ukraine, in the hope that approval from Brussels will reduce the impact of additional spending on its borrowing costs, sources close to the matter told MNI.
Italy, which favours an extension of the waiver on rules on public borrowing and debt in Europe’s Stability and Growth Pact and is already concerned by the recent rise in its bond yields, wants any additional spending to be perceived by investors as part of a joint European trend, said one of the sources. While the SGP is already suspended for 2022, extending that until 2023 would signal to markets that Italy is not alone in needing to spend more, they noted.
“We don’t want to be seen as the sick man of Europe again,” the source said.
Government officials told parliament’s budget committee that a phrase included in the Economic and Finance Document earlier this month indicating that there could be more “measures to support the economy if the situation worsens” was meant to prepare investors for additional spending while Italy secures support from Brussels, three sources from the committee told MNI.
The inclusion of the phrase, among changes to the document negotiated with lawmakers before its parliamentary approval, came after Prime Minister Mario Draghi earlier resisted calls by parties supporting his government for a budget deficit increase in response to the Ukraine war, the sources said. The document foresaw a 2022 deficit of 5.6% of gross domestic product, in line with government expectations last October but including about EUR10 billion in new stimulus measures made possible by a better-than-expected performance by the public finances, which would otherwise have reduced the deficit to 5.1%.
ITALY WANTS NEW EU PACKAGE
The government told committee members that it would press Brussels for a new economic aid package in response to the war and soaring energy costs along the lines of the EUR800-billion NextGenerationEU produced during the Covid pandemic. It also wants an extension of the waiver on Stability and Growth pact borrowing and debt rules and moves to cap gas prices within the bloc, sources told MNI.
An EU official told MNI that an extension of the SGP waiver looks more probable than more EU money.
“Suspension of the SGP for a further year is the line of least political resistance, so support via that channel seems more likely than further joint support,” the EU source said, adding that pledges by the European Central Bank to avoid any fragmentation of monetary conditions across the eurozone may help suppress borrowing costs.
SIMILAR TO COVID
The Italian government’s Economic and Finance Document largely assumed that the war would end soon and that gas imports from Russian will not be affected in a substantial way, Senator Vincenzo Presutto, from the populist Five-Stars Movement, told MNI.
“If the war does stop now, the current document would be very adequate,” Presutto said, adding that Finance Minister Daniele Franco told lawmakers it was necessary to have a flexible attitude to spending given the high level of uncertainty. But the war may turn out to be similar in effect to Covid, he added.
“We initially thought that [the pandemic] would last just a couple of weeks and that a little additional spending would be enough, and we ended up with more than EUR225 in stimulus,” he said.
A Finance Ministry spokesman declined to comment to MNI.
So far there is no consensus among the parties supporting Draghi’s government as to the size of any future stimulus, sources said. Some say that EUR10-15 billion would be sufficient to support the economy if conditions do not deteriorate further, while the centre-left Democratic Party would favour an additional EUR25-30 billion if gas imports were to be affected.