October 19, 2018 / 9:40 AM / a month ago

Breakingviews - Italy tries risky EU gamble on budget

Italian Prime Minister Giuseppe Conte speaks during the day of commemoration to mark one month since Morandi bridge collapsed in Genoa, Italy, September 14, 2018. REUTERS/Massimo Pinca

MILAN (Reuters Breakingviews) - Italy’s radical government is trying a risky gamble. Its promise to boost spending has triggered a clash with the European Commission. Lengthy procedures mean the spat could drag on until European Parliament elections in May. With radical parties gaining ground, the next Commission may be more lenient or weaker. But intense market pressure could spoil the plan.

Rome’s EU-sceptic coalition partners – the 5-Star Movement and the League – want to boost the budget deficit to 2.4 percent of GDP in 2019 to fulfil expensive electoral promises. That’s below an EU’s self-imposed cap of 3 percent but above the 1.8 percent deficit target this year. And it breaches EU rules that require countries to cut their deficit to lower debt, particularly when, like Italy, their borrowing is as high as 131 percent of GDP.

Commission President Jean-Claude Juncker, engaged in an escalating slanging match with Italian leaders, wants budget changes, and could open an excessive deficit procedure, a process that can lead to fines. Such threats could fall on deaf ears in Italy. Italy’s spending plans are popular with voters, while the EU is not. Only 44 percent of Italians in an October Eurobarometer poll backed the union, the lowest proportion of any EU country. 

Rome knows that a formal EU censure would take time. Italy has until December to approve its budget. And the Commission would be unwise to act before April, when it might have data showing Italy’s debt will not fall. That’s just a month before EU voters choose the next Parliament, which will approve Juncker’s successor, and vet commissioners. Rising support for anti-EU movements means mainstream conservative and socialist parties will not be able to control the assembly. The new executive would reflect a more fragmented and radical political landscape, and could turn out to be less rigid than the present one, or weaker.  

While the EU process is lengthy, bond markets’ judgment can be swift. Interest rates on Italy’s 10-year sovereign debt have risen to a four-year peak of 4.2 percent. The turmoil could hit the economy, and trigger banks’ insolvencies. It could also strain the bickering coalition and prompt a government collapse. Italy’s budget gamble is already backfiring.

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