MNI: Italy Makes EU Fiscal Rules Push As Deficit Nerves Grow

Italy is pushing its European Union partners to remove expensive housing construction subsidies from calculations on borrowing limits under the bloc’s new fiscal rules after being forced to include them by Eurostat, as Rome heads for a potential clash with Brussels over its fiscal deficit, governing coalition sources told MNI.

While European Union countries still look far apart in talks over reforms to the Stability and Growth Pact debt rules, Italy is increasingly worried that without changes to the framework it will be non-compliant with the existing limits, which are due to come back into force in the new year after having been suspended due to Covid and the economic impact of the war in Ukraine.

In a significant concession to Brussels, Prime Minister Giorgia Meloni is likely to push through parliamentary ratification of changes to the European Stability Mechanism in November, a move likely to cause strains within her coalition, but Rome is still uncertain whether this will be enough to win European acquiescence to its petitions. In addition to its fiscal rules wishlist, Italy also seeks approval for sweeping changes to its National Recovery Plan used as a basis for EUR200 billion in aid under the NextGenerationEU plan, as well as European help with surging migrant arrivals.

HIGHER RATES HURTING

Meanwhile higher European Central Bank rates are putting significant pressure on Italy’s debt costs, and the government’s new macroeconomic framework is set to project a sizeable increase in fiscal deficits for this year and next, as well as lower economic growth, putting it on the path to a rebuke from Brussels. Meloni has already tried to raise funds with a windfall tax on banks, but the negative reaction means the measure has had to be watered down. (See MNI: Italy To Raise 2022 Fiscal Deficit Target Close To 5% GDP)

Spain, holder of Europe’s rotating presidency, still hopes new EU fiscal rules will be agreed before the old ones come back into force, but talks remain stuck, with southern countries including Italy looking for deficit calculations to be relaxed while others such as Germany insist overly indebted states must trim excess debts quickly. (See MNI:New Impetus But No Substantive Progress In EU Fiscal Talks)

Italy’s negotiators led by Finance Minister Giancarlo Giorgetti are now asking for “Super Bonus 110%” house construction subsidies as well as some of the country’s green and digital investments under NextGenerationEU to be excluded from the new fiscal rules’ deficit calculations, the coalition sources said. Italy has previously called for green investments to be exempt, a request which has so far been blocked by the EU’s north.

EUROSTAT RULING

Compliance with the old Stability and Pact rules will be “mathematically impossible” for Italy, according to Giorgetti, who wants to avoid unpopular spending cuts.

Italy has already tried to exclude Superbonus 110% from its deficit calculations but was told by European statistical agency Eurostat this week that it must be included, potentially pushing up the country’s deficit by EUR20 billion or almost 1% of GDP a year over the next three years. The policy was implemented under former prime minister Giuseppe Conte.

Meloni’s government is increasingly worried that it will not be able to meet electoral promises including tax cuts as it faces tough talks with Brussels, sources said.

“It is too early to talk about government fatigue but we will soon be there. The budget will be painful and we haven’t even started,” one of them said