EU rejects Italy's budget in eurozone first

PARIS - 24 October 2018: The European Commission on Tuesday rejected Italy's draft 2019 budget, the first time the EU executive has ever sent a member state back to the drawing board over spending plans.

Charging Rome with "openly and consciously" flouting pledges made, the Commission gave Italy's populist government three weeks to present a new plan to curb spending in line with the rules.

"Today for the first time the commission is required to ask a euro area country to revise its draft budgetary plan," Commission Vice President Valdis Dombrovskis told a press conference.

Despite its "regret", he said, the executive arm of the 28-nation European Union saw "no alternative" than to ask Rome for a new draft as clarifications it sent Monday failed to dissipate concerns member countries raised in July.

"The Italian government is openly and consciously going against commitments made," Dombrovskis said.

"Europe is built on cooperation," he said. "If trust is eroded all member states take damage. Our union takes damage."

Italy's far-right Deputy Prime Minister Matteo Salvini insisted Italy stood by its budget, warning Brussels was only angering Italians even more and eroding faith in the bloc.

Sitting next to Dombrovskis, European Economics Commissioner Pierre Moscovici said the "ball is not touching the line, it is far from the line".

If Italy fails to comply with the Commission's request, he warned, it could face disciplinary action. This could lead to fines of 0.2 percent of its GDP, or 3.4 billion euros, based on 2017 figures.

Italy's government says it will stick to a deficit of 2.4 percent of annual economic output next year, which would be triple the amount forecast by the previous government and approach the EU limit of 3.0 percent.

In turn, it would aggravate Italy's already huge debt mountain, at some 130 percent of gross domestic product (GDP), way above the EU's 60-percent ceiling and second only to Greece's in Europe.

- 'Not get into a panic' -

Dombrovskis said last year Italy's debt represented an average burden of 37,000 euros per inhabitant and it spent about the same amount to service its debt as it did on education.

"Experience has shown ...that higher fiscal deficits and debt do not bring lasting growth. Exessive debt makes your economy more vulnerable to future crisis," he said.

But the coalition government of the anti-establishment Five Star Movement (M5S) and anti-immigrant League has said it would reduce total debt to 126.5 percent in 2021.

Italian Prime Minister Giuseppe Conte told journalists on Monday that the budget is designed to spur growth and avoid a recession.

In its four-page letter to the Commission, Italy's government admitted its budget was "not in line with the norms of the stability and growth pact" governing EU member state public finances.

"It was a difficult decision but necessary given the delay in achieving pre-crisis GDP levels and the dramatic economic situation of the most disadvantaged in Italian society," the letter said.

The eurozone's bailout fund director, Klaus Regling, said shortly before the announcement there was no need to panic over Italy's high-spending plans.

"The (Italian) fiscal plans are not in compliance with the legal framework, but Italy is not the next Greece," the German head of the European Stability Mechanism said.

"One should not get into a panic," Regling said, adding Italy has not lost its ability to compete, and a large part of its debt is financed internally.

He said there was "very, very limited risk" of contagion to other countries.

When the euro area was formed in 1999 and the euro currency introduced in 2002, Italy was among the 11 original members -- of the 15 EU member states that existed at the time.

In the years following the 2007-2008 financial crisis, the commission has set stricter limits on spending and gained more power to enforce them.