The European Commission rejected Italy’s 2019 budget in an unprecedented decision on Tuesday (23 October), after the government in Rome failed to give a substantial response to the executive’s allegations of a breach of the EU law.

“For the first time the Commission is obliged to request a euro-area country to revise its draft budgetary plan but we see no alternative than to request the Italian authorities to do so,” announced Vice-President for the euro Valdis Dombrovskis.

The Commission’s decision followed an exchange of letters between Brussels and Rome after the first assessment of Italy’s budgetary plan. “The clarifications received yesterday were not convincing,” Dombrovskis added.

The EU executive expressed “serious concerns” last Thursday (18 October) over Italy’s draft fiscal plan, which incurred in an “unprecedented breach” of the fiscal pact. The Italian Finance minister Giovanni Tria admitted it but argued it was a “difficult but necessary” decision.

The decision, however, should not come as a surprise to anyone, Commissioner for Economy Pierre Moscovici pointed out. “It was clear we were confronted with an unprecedented situation,” he said.

“The Italian government is openly and consciously going against commitments made,” Dombrovskis acknowledged. “If trust is eroded, all member states are damaged, our Union takes damage,” he warned.

“We are not confronted with a borderline case; we are confronted with a deviation which is clear, net, assumed and even for some, claimed,” Moscovici insisted.

The Italian government has now three weeks to submit a new proposal.

The debt the enemy of the people

In May this year, the Commission considered the possibility of opening an excessive deficit procedure against Italy due to its high debt. The decision was never made because the Italian government was broadly complying with the Stability and Growth Pact then.

As this is no longer the case, this conclusion “may require a reassessment,” Vice-president Dombrovskis warned.

Although it is not clear that the Commission would want to go down this road, the procedure could eventually lead to a fine of up to 0,2% of the Italian budget.

Italy was expected to approve a downward budgetary adjustment worth 0.6% of its GDP. But instead, it presented an expansionary budget of around 1% of GDP. Moreover, its deficit will reach 2.4% of GDP next year, compared with 0.8% of GDP targeted by the previous government.

“The revival of public investment and the modernisation of the infrastructure will result in an increase in the returns on private investments and therefore in their amount,” the Italian government argued.

Italy’s prime minister insists no room to change 'beautiful' budget Italian Prime Minister Giuseppe Conte has attempted to open a dialogue with the European Commission in an attempt to calm things down over Italy’s “unprecedented” breach of fiscal rules, but has also warned that there will be no step back on the draft budgetary plans.

However, with its decision, the Commission made clear that this is not enough to justify a major deviation from the fiscal adjustment, particularly when the Italian public debt is around 130% of GDP.

Brussels does not intend to intervene in “internal and legitimate choices” of the Italian government, Commissioner Moscovici said, but is concerned with “the budgetary impact of those policies on the citizens.”

“It is tempting to try to cure debt with more debt but at some point the debt weight is heavy and at the end of the day you end up having no freedom at all,” Dombrovskis warned.

Italy must reduce its debt because debt “is the enemy of the economy, it is the enemy of the European people,” Moscovici stressed, while Dombrovskis said, “fiscal deficit and debt do not bring lasting growth and excessive debt make the economy more vulnerable to a future crisis”.

The Commissioner recalled as well that Italy has made use of the flexibility mechanism within the fiscal pact to invest more than €30 billion and has received millions of euros through the Juncker Plan and the EU Cohesion Policy.

Brussels keeps calling for dialogue

Upon his appointment as finance minister, Giovanni Tria stated his intention to comply with the EU rules to reassure the institutions and the markets hitting on Italian bond yields.

However, in his response to concerns from Brussels about the Italian public accounts, Tria said that the “obvious significant deviation” from the recommendations adopted by the EU Council of Ministers for 2019 was intended.

Furthermore, Italian Prime Minister Giuseppe Conte warned in Brussels last week that there was “no room for change” in Italy’s budget plan despite the rising concerns.

In spite of recent developments, the Commission still considers Tria a “credible” interlocutor and invited the Italian government to continue with the dialogue once again.

Although the excessive deficit procedure is on the table, the Commission is not there yet. “The ball is now in the court of Italy’s government,” Valdis Dombrovskis said. “Today we are asking for resubmission, let’s give dialogue a chance,” added Moscovici.

In a few weeks, the Eurogroup will discuss eurozone member draft budgets. “I urge all parts to remain engaged in a constructive dialogue,” president of the Eurogroup Mario Centeno said on Twitter following the Commission’s decision. However, Centeno warned, “Italy needs to do an extra effort to comply with our common rules.”