RPT-MNI: Italy To Seek To Avoid Excessive Debt Procedure

(Repeats story first published on Feb 9)

Italy will try to persuade its European Union partners that the upcoming approval of new EU fiscal rules means the old regulations should be partly suspended in a “transitional year” before the revised strictures come into force, allowing them to shift part of their interest bill to the end of a future adjustment period, Italian government sources told MNI.

Italy, together with other countries including France, is set to face an Excessive Deficit Procedure mandating a steep fiscal adjustment under rules of the Stability and Growth Pact which came back into force this year following their suspension due to the economic impact of Covid and the war in Ukraine. But with reforms to the Pact currently close to approval in Trilogue talks between representatives of the EU’s parliament, the European Commission and the Council, which would see them enter into effect in 2025, Rome will argue that the old rules should no longer be fully enforced, two Italian government sources said. (See MNI: EU Nears Fiscal Rules Deal In Trilogue Talks)

Italy already aims to reduce its public deficit to 4.3% of GDP this year and is resisting the temptation to boost spending as growth falls, the sources noted, though acknowledging that this was still far from the Pact’s 3% limit. While the new fiscal rules would insist on the same 0.5%-per-year adjustment as the old, they would also allow interest rate costs to be backloaded to the end of a programme. (See MNI: Italy Set To Downgrade 2024 GDP Forecast In April)

“We show a downward path and that should be enough in this interregnum phase”, said one of the Italian sources, noting that the EDP would be decided after European parliamentary elections in June. Italian Prime Minister Giorgia Meloni hopes for a strong showing from her Brothers of Italy party, which Italian officials believe could give them more leverage over Commission President Ursula von der Leyen as she seeks another term in office.

FRUGAL OBJECTIONS

But the Italian vision will be strongly resisted by countries from the so-called “frugal” grouping.

“Any EDP opened this year for a country with a deficit as high as Italy’s or France’s would be for multiple years anyway, with the adjustment requirements applying from next year,” said one EU official, noting that both countries were already reducing their deficits anyway.

Italy foresees cutting its deficit to 3.6% of GDP by 2025, but the Italian officials said that Rome did not want to commit to a detailed adjustment programme with the Commission. Instead Italy would prefer a seven-year reduction target, including promises of economic reform, as set out in the proposed reforms to the Stability and Growth Pact, despite doubts remaining on how these new rules will work in practice, one of the officials said.

“The Italian idea is completely nonsensical. Legally, transitional years do not exist. The old rules are still in place, and there is no general escape clause”, one official from a frugal country told MNI, adding that if the Commission does not start EDPs, it could be sued to the EU Court of Justice.

In recent remarks, European Economy Commissioner Paolo Gentiloni said eight or nine countries were likely to face EDPs in 2024, but that Brussels would postpone the opening of the procedures to the second half of the year, after elections to the European parliament.