One week after the European Commission’s veto on Italy’s 2019 economic plan and the infringement procedure is becoming a reality. The new “yellow-green” Italian government, namely the Five Stars Movement and Northern League, is starting to take a step back, even if only with one leg. Despite the tough talk up until now, Italy fears the European Union and the possibility of receiving severe penalties. Thus, negotiations have been opened up once again between the leading parties.

The dissent first started inside the Italian government itself, when Minister of Economy and Finance Giovanni Tria suggested setting the deficit-to-GDP ratio at 1.6%, in line with the decreasing trend of the last few years. But setting the ratio to 1.6% clashed with promises made by the leading parties during the campaign, thus there was urgency to find more financial resources. Ultimately, after trying to compromise with Minister Tria, the far-right populist government moved toward a new ratio of 2.4%.

According to EU rules, the deficit-to-GDP ratio must be under 3% (according to the Maastricht Treaty), after which an infringement procedure might be invoked. When evaluating the sustainability of an economic plan with high levels of deficit, the European Commission also considers the country’s economic stability, growth, and its public debt. Other countries have presented an economic plan with a higher ratio without having their economic plan rejected. But in Italy, the growth prevision is not in line with the one provided by the European Commission; moreover, the country has a public debt of 131% of its GDP, placing it among the three worst in the euro zone. Therefore, despite higher deficits in France (2.8% deficit-to-GDP ratio) and Romania (3.8%), these countries aren’t at risk of falling into the infringement procedure due to their different growth and public debt outlooks.

Upon receiving the request from the European Commission to reduce the ratio to 1.8%, the Italian government immediately declared its unwillingness to make any changes. But less than a week later, the tough talk is starting to fade away. Now, the government is trying to obtain more time to negotiate with the European Union to avoid the infringement procedure, which is scheduled to commence in January 2019. Some measures are already being discussed in Italy, such as the “Quota 100,” certain pension reforms, and the “Citizenship Salary,” which might be postponed in order to reduce the deficit. Either way, the Rome Government, through its Minister of the Interior Matteo Salvini, signaled that it is not considering cutting the budget deficit target to below 2.2% of gross domestic product.

The Italian Prime Minister, Giuseppe Conte, finds himself stuck under the pressure coming from the two Deputy Prime Ministers, Di Maio and Salvini, with no room for independent maneuver. After the G20, the prime minister declared his willingness to cooperate with the European Union, and that “we trust in the coming days we will be able to discuss a technical solution.” This created unprecedented tensions between the ministers, driving a wedge between the one willing to cooperate with the EU and the more committed eurosceptic.

Between the bond market, intra-coalition politics, and the Brussels-Rome relations, it’s going to be an interesting parliamentary term in Rome.

 

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