The Rome-Brussels Spat Continues, but Both Seem to Be Ready for Compromise

In the unprecedented duel between Italy and the EU Commission, each side has its own goals and it is hard to imagine when it will stop. Indeed, if one follows the daily blows between Brussels and Rome, the clash seems to be without any possible solution. Fortunately for Italy, and probably also for Europe, things are not exactly like that. Not yet.

For several weeks, the EU bureaucrats and the Italian government have been forced to go ahead with threats, accusations with intransigent and increasingly heated tones. The European Commission, which completely rejected the annual budget of a member state for the first time, demanding to rewrite it, essentially argues that Italy cannot hope to have a 2.4% deficit (far from the promised 1.6%) with a debt that exceeds 130% of the GDP. Rome responds that violation of deficit pacts is necessary if the country wants to be brought back to sustainable growth. Prime Minister Giuseppe Conte and his two most powerful deputies Matteo Salvini and Luigi di Maio agree on the impossibility of backing down. The leaders of the League and the Five Star Movement are more and more clearly in contrast on many points of the government “contract,” but they are united in reiterating that on the deficit issue “we will not give up a centimeter.”

The “Italian problem,” which does not allow the governments of half of Europe (starting from Germany) to sleep peacefully, is not the deficit, but the debt. It is virtually out of control (every Italian citizen has 37 thousand euro of public debt on their shoulders and the debt service expenses in 2017 amounted to 65 billion euro). And it is even more serious today, because the end of the European Central Bank’s Quantitative Easing (purchase of government bonds by the ECB) is approaching, which for Italy means finding itself in the open sea for the financing of its own debt. And here comes the European nightmare: if Italy goes into default, what happens to its banks, and consequently to the European banking sector? There is only one answer, from all of the Eurozone capitals: Italy is too big to fail, because in the event of a major financial crisis it would overwhelm the European currency.

Brussels Worried by Italy’s Profligacy. Will the ‘Enfant Terrible’ Be Punished?
Elena Maslova
The yellow-green coalition of Luigi Di Maio and Matteo Salvini continues to earn citizens’ support in the Rome-Brussels confrontation (the migration issue is also very acute). If the Italian version of the budget is adopted, Brussels will lose face, showing that it cannot keep the EU discipline. However, in this case the EU Commission has the right to impose sanctions against Italy.

For this reason the war of declarations is accompanied by cautious, discrete work to find a way out, or rather a middle point that would allow to resolve the conflict. The common objective, apart from the great proclamations, is to avoid the lethal outcome of the duel on the Italian budget on the eve of the European elections in May, which can seriously change the political panorama of the Union. The danger is not the launch of sanctions procedure against Italy, but the downward spiral of the crisis and related speculations on the markets, which could sink Italy.

Mario Centeno, president of the Eurogroup, can enter into action as mediator, convinced that small, but sufficient steps from the Italian side are possible. From France and Spain, even from Germany, signs of flexibility come to prevent “the trial of Italy” resulting in an unmanageable situation. In Rome, President of the Republic Sergio Mattarella insists on a compromise and Minister of the Economy Giovanni Tria tries to make his own way: the EU rejected two main items of the budget document –retirement facilitation and basic income support for those who do not have a job – almost 16 billion euros are needed, but to spend them it is necessary to adopt special laws. In practical terms, it would be enough to postpone the entry into force of these norms and to adjust the deficit/GDP ratio downwards and move closer to the EU demands. Of course, the electorate of the League and M5S want to see the great pre-electoral promises immediately realized, but after the European elections (and perhaps new legislatives in Italy) there will be time to try and fix things.

The Italian government is betting on the European elections, aiming to free the European Central bank from the fiscal rigor promoted by Germany. But the new Italian leaders (certainly, including Matteo Salvini) know that even in a completely different political framework it will be difficult to find countries willing to risk for the sake of guarantees for the “free choice of the Italian people.” Salvini also knows that the “friendly” sovereigntist parties will be the first to attack Italy. So a low-profile compromise is better. It would allow politics to trump the economy.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.